The semiconductor industry is set for massive growth, thanks to the growing usage of chips across various applications that range from smartphones to computers to cars to factories.
According to a third-party estimate, the semiconductor industry could top $1 trillion in revenue by 2030, compared to $466 billion in 2018. There are several companies through which investors could tap into this lucrative market. Taiwan Semiconductor Manufacturing (TSM -0.34%), better known as TSMC, Synaptics (SYNA 3.09%), and Lam Research (LRCX -0.28%) are three semiconductor stocks that could win big from the broader market's growth.
Let's look at the reasons these three semiconductor stocks are worth buying right now.
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1. Taiwan Semiconductor Manufacturing
With share prices down 10% in 2022, TSMC looks like an attractive bet right now. It's trading at 27 times trailing earnings, which is a discount to last year's earnings multiple of 30. Buying the stock at this relatively discounted valuation looks like a good idea given the company's impressive growth and its role in the semiconductor industry.
TSMC is the largest semiconductor foundry in the world and supplies chips to several major chipmakers, including Advanced Micro Devices, Apple, Qualcomm, and Nvidia, among others. Not surprisingly, the demand for TSMC's chips is increasing at a solid pace. It finished 2021 with revenue of $56.8 billion, an increase of 18.5% over the prior year. Its earnings increased 15% during the year to $4.12 per share.
In 2022, TSMC's revenue is expected to jump nearly 28% to $72.7 billion per analysts' estimates. Adjusted earnings could increase 36% over last year to $5.61 per share. The estimates are on the slightly higher side, as TSMC management had hinted at revenue growth in the mid-to-high twenties this year on the company's January earnings conference call. However, it won't be surprising to see TSMC meet, or even exceed, Wall Street's expectations, given the growing demand for chips used in smartphones, the Internet of Things (IoT), high-performance computing (HPC), and automotive.
Investors should note that the demand for chips in all these markets is set to explode in the long run. For instance, the global 5G smartphone market is set to grow at an annual pace of nearly 123% for the next five years, which points toward a nice jump in semiconductor demand from this segment. The demand for automotive chips is expected to increase at over 13% a year for the next decade, while the IoT chip market is anticipated to clock 15% growth through 2026.
So, TSMC is operating in a market that's built for secular growth, and the company is going all out to capitalize on the end-market opportunity. That's evident from TSMC's planned capital expenditure of $40 billion to $44 billion for 2022, compared to the $30 billion it spent last year. This also explains why TSMC expects to outgrow the market it operates in.
Finally, with analysts expecting TSMC's earnings to increase at an annual pace of 20% for the next five years, now would be a good time to buy this top semiconductor play, since it could deliver terrific upside in the long run.
2. Synaptics
Synaptics crushed the stock market last year. Shares of the company that supplies chips for the IoT, mobile, and personal computing (PC) markets tripled in 2021. The tech sell-off has erased nearly a quarter of Synaptics' value so far this year, bringing its price-to-earnings (P/E) ratio down to 62, compared to 91 last year.
Of course, Synaptics stock is still expensive considering that the Nasdaq-100 Technology Index has a P/E ratio of 33, but investors should note that the stock sports a five-year average P/E ratio of 104. Additionally, Synaptics' rich valuation seems justified given the pace at which its largest business is growing. The company reported 18% year-over-year revenue growth in the second quarter of fiscal 2022 to $421 million, driven by a 60% increase in IoT revenue.
The IoT business produced 62% of Synaptics' total revenue last quarter, and it's set for better times ahead thanks to the growing demand for the company's wireless products. Synaptics points out that it has scored design wins across several IoT applications including drones, surveillance cameras, and smart speakers, among other devices. Synaptics estimates that its design win pipeline could help double its wireless revenue in the future.
The company's IoT business is now clocking an annual revenue run rate of $1 billion. It won't be surprising to see it get bigger as the adoption of IoT devices gains momentum. According to a third-party estimate, the number of connected IoT devices is expected to increase from 10 billion last year to more than 25 billion by 2030, which should pave the way for the secular growth of the IoT business.
Meanwhile, the automotive business is also turning out to be a key growth driver for Synaptics. The chipmaker's automotive revenue run rate is currently at $100 million annually, but a solid design win pipeline with 50 car models spread across over 20 automotive OEMs (original equipment manufacturers) should help it step on the gas. The good part is that six automotive OEMs have already started making products using Synaptics' chips.
More importantly, Synaptics' growth is about to switch to a higher gear. The company expects $3.55 per share in earnings this quarter on revenue of $465 million, which would translate into 75% earnings growth and 43% revenue growth over the prior-year period. The fast-growing markets that Synaptics serves should help it sustain such impressive growth in the long run, which is why investors should consider buying this tech stock while it's still down.
3. Lam Research
Lam Research supplies semiconductor manufacturing equipment to foundries and chipmakers such as TSMC, Samsung, SK Hynix, Intel, and Micron Technology, among others. This puts the company in a solid position to take advantage of the booming chip demand.
The company's solid client base explains why its top and bottom lines are growing at a nice pace. Its fiscal 2022 second-quarter revenue was up 22% year over year to $4.23 billion, while non-GAAP earnings shot up 41% to $8.53 per share. More importantly, Lam's deferred revenue more than doubled year over year. Lam had $640 million in deferred revenue at the end of 2020, a figure that increased to $1.46 billion by the end of the December 2021 quarter.
What's more, Lam estimates that its deferred revenue could increase by another $500 million this quarter. The increase in Lam's deferred revenue points toward the robust demand for the company's offerings. That's because deferred revenue refers to money a company collects in advance for services that will be delivered later. Once the product or service is delivered, deferred revenue is recognized as actual revenue on the income statement.
CFO Doug Bettinger said on the company's January earnings conference call that the order backlog has grown for five straight quarters. The company should also continue enjoying robust order growth in the future, thanks to a ramp-up in memory manufacturing capacity. Specifically, Lam gets 58% of its total revenue by supplying equipment to memory manufacturers such as Samsung, Micron, and SK Hynix.
Micron is going to spend $150 billion over the next decade to boost memory chip production, while Samsung and SK Hynix are also on track to invest substantially to boost their manufacturing capacity in new markets. This indicates that Lam could sustain its impressive growth in the long run.
Lam's stock price is down nearly 22% in 2022. It now trades at just 17 times trailing earnings and 14 times forward earnings. These multiples are lower than the stock's five-year average earnings multiple of 19. Along with Lam's fast growth pace and solid prospects, this makes it a top semiconductor stock investors should consider buying right now, as it could regain its mojo and soar higher in the long run.
