One ripe area to find future winners during the market sell-off is the semiconductor industry. Memory, storage, and advanced processors are expected to remain in high demand over the long term as vehicles, 5G smartphones, and other consumer devices are becoming more technologically advanced.
This trend is already fueling rising demand at Taiwan Semiconductor Manufacturing (TSM -0.24%) and Micron Technology (MU 0.33%). Both stocks trade at attractive price-to-earnings (P/E) ratios relative to future growth expectations, especially Micron. Moreover, both stocks have outperformed the broader market over the last few months, indicating that they could power the next bull market run.
1. Taiwan Semiconductor
TSMC is the leading chip foundry in the world, and it has a long record of delivering double-digit annualized growth in revenue and profits. It manufactures high-performance chips for just about every leading chip company in the world.
TSMC is coming off a strong year, in which revenue grew 25% over 2020. Analysts see revenue growing another 29% in 2022 to reach $73 billion.
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What's most impressive about TSMC's recent growth is that it is coming from several different markets. Smartphone revenue was up 8% last year, accounting for 44% of TSMC's total revenue. High-performance computing (e.g., data centers) sales were up 34%, the Internet of Things grew 21%, and automotive was the fastest-growing category, up 51% year over year.
The upgrade cycle for 5G phones and rising spending on data-center infrastructure are fueling strong demand for TSMC's chip technologies. In 2021, TSMC spent $30 billion to capture this demand and drive growth. The company plans to increase its capital budget this year to at least $40 billion to support the development of advanced process technologies, such as 2-nanometer, 3-nanometer, and 5-nanometer chip designs.
Management expects long-term revenue to grow between 15% to 20% per year on an annualized basis. That should translate to similar growth in profits and fuel market-beating returns. The stock sells at a market-average forward P/E ratio of 22 and pays a dividend yield of 1.58%.
2. Micron Technology
Micron is a leading provider of memory and storage products used in personal computers, but it's also seeing growing demand from data centers, 5G devices, and electric vehicles. Revenue grew 29% in fiscal 2021 ending Sept. 2, and it's off to a good start in fiscal 2022.
Management expects revenue to reach a new record in fiscal 2022. The top line increased by 33% in the fiscal first quarter, and analysts expect revenue to advance 16% for the full year before increasing 20% in fiscal 2023.
Management is optimistic about the near-term outlook in the PC market. PCs are experiencing healthy demand right now, with consumers starting to buy multiple PCs per household.
Management also sees a brisk pace of demand coming from data centers. Major cloud companies like Microsoft and Amazon continue to spend billions of dollars on cloud infrastructure. This is a long-term growth driver for Micron's solid-state drives (SSDs) used in data servers. Sales of non-volatile flash memory (NAND) used in SSDs made up 24% of Micron's revenue in the most recent quarter.
The stock price still looks cheap after the recent rebound. It trades at a P/E of 10 based on fiscal 2022 earnings estimates and pays a small dividend yield of 0.22%. Analysts expect the company to post annualized earnings growth of 24% over the next five years.
Sound investments in technology
It's possible the current dip in stocks could turn into a more severe market correction, which could drag the best companies down with it. But the smart money seems to be positioning its chips behind TSMC and Micron, given the shares' relative performance to the broader market in recent months.
The growing semiconductor industry should generate satisfactory returns for shareholders over the next five years and beyond.
