If you invested in the benchmark S&P 500 stock market index five years ago and held on until today, you would have nearly doubled your money with a return of 92%. While that's perfectly respectable, it's trounced by the gains in the technology-centric Nasdaq 100 index, which has risen 174% over the same period.
But one industry in particular has crushed both of those widely followed benchmarks. The semiconductor sector, represented by the iShares semiconductor ETF, has gained 260% over the past five years.
It's a reflection of the importance advanced computer chips (semiconductors) have in the technologies that power our everyday lives. From computers to phones to electric vehicles, chips are a critical component, and the industry's growth might just be getting started. These two stocks could be among the biggest winners.
1. The case for Micron Technology
Micron Technology (MU 4.34%) released its fiscal 2022 second-quarter earnings report on March 29, and it revealed further evidence that the company's chips are in hot demand. Micron is the leading producer of memory (DRAM) and storage (NAND) semiconductors popular in personal computing and data center applications, but it's also experiencing rapid growth in the automotive segment, driven by electric vehicles.
In fact, Micron says automotive revenue hit a record high during Q2 amid fast-paced innovation across the industry. The company refers to electric vehicles as "data centers on wheels," and it anticipates the release of up to 100 new models in 2022 alone, which could fuel a major demand cycle for Micron's chips.
But that's not the only emerging end market that warrants excitement. Micron is benefiting from the transition to the 5G network through its mobile DRAM and NAND products. Devices that operate on the 5G network can use up to 50% more memory and double the storage capacity of 4G devices, which will spur organic growth for Micron over the next few years. Up to 700 million 5G-enabled smartphones could be sold in 2022, an increase of 40% from 2021.
The company generated $7.8 billion in total revenue in Q2, representing 24% growth year over year, and it says it's on track for a record full-year sales result. Analysts are backing that up, estimating $33.5 billion in revenue for fiscal 2022. But profitability might be the real story this fiscal year, as Micron could deliver $9.54 in earnings per share, up 59% on fiscal 2021.
That's important because it places Micron stock at a forward price to earnings multiple of just 8, which is 69% cheaper than the Nasdaq 100 index, which trades at a forward multiple of 26. It means Micron would need to triple in value just to trade in line with the broader tech market, and with fast-growing electric vehicles and 5G devices becoming more prevalent, it just might.
2. The case for Advanced Micro Devices
Advanced Micro Devices (AMD 0.06%) is one of the most recognizable semiconductor brands in the world. It specializes in computer processing and graphics chips that are particularly popular for gaming purposes. In fact, its chips are used in the hottest consoles, including the Sony PlayStation 5, and the Microsoft Xbox.
But AMD is also a leader in powering cloud computing, supported by partnerships with top cloud providers like Amazon, Microsoft, and Alphabet's Google. This segment outgrew computing and graphics in the 2021 full year, with revenue soaring by 113% compared to 2020.
Like Micron, AMD is also making inroads in the electric vehicle market, although in a slightly different way. In mid-2021, the company inked a deal with Tesla to power the digital entertainment systems inside the Model 3, Model S, and Model X electric cars. These systems are more akin to personal computers than the typical dashboards in most cars -- even supporting the ability to play games -- hence they require powerful processing capabilities.
Put simply, AMD is at the cutting edge of computing and graphics, and from a financial perspective, the company is performing better than ever before. In 2021, it delivered record-high revenue of $16.4 billion and expanded its gross profit margin to 48%, which triggered a 117% jump in adjusted earnings per share, to $2.79.
Profitability was powered by a sales mix that leaned toward higher-margin products but also a favorable economic environment for the industry with pandemic-driven chip shortages persisting, combined with soaring demand as more goods and services require advanced computing hardware.
Analysts anticipate these trends will continue, predicting AMD will grow revenue by 54% in 2022 to $25.3 billion, accompanied by another record-high earnings result. But in the long run, if the semiconductor sector continues to outperform the broader market, AMD is one of the highest-quality stocks to hold.