The semiconductor industry is arguably the most important contributor to modern-day electronics, from computers to smartphones and even cars. The sector is responsible for producing advanced computer chips that power those technologies, and in the next decade, it could be worth over $1 trillion annually.
That's an incredible opportunity for companies like Advanced Micro Devices (AMD -1.57%), Nvidia (NVDA 3.69%), and Texas Instruments (TXN -0.40%), which are among the leading players in the semiconductor industry. Three Motley Fool contributors think those stocks are the best way to capture the chip sector's future growth, and they could be ultra-long-term performers for your portfolio.
A leader with best-in-class customers
Anthony DiPizio (Advanced Micro Devices): Processing and graphics chips produced by AMD are among the most sought-after in the world. They're the component of choice to power popular gaming consoles like Microsoft's Xbox and Sony's PlayStation 5, in addition to the personal computers of millions of customers globally.
AMD highlighted the versatility of its chips when it inked an exciting partnership with leading electric-vehicle maker Tesla in 2021. Electric cars are more akin to drivable computers than their internal-combustion predecessors; they require significantly more processing power, creating a potentially new market for semiconductor makers. AMD's chips will power the infotainment systems inside Tesla's popular Model S and Model X cars, which centrally control their extensive digital features, including the ability to play games. More recently, this partnership expanded to include Tesla's Models 3 and Y.
AMD is also making strides in other futuristic industries like virtual reality (VR), developing chips for VR headset makers like Oculus, which is owned by social media giant Meta Platforms. AMD has progressed the experience with its LiquidVR technology, designed to reduce motion sickness by delivering smoother, more seamless graphics.
While such innovative new tech could drive the future of AMD's business, the company is generating significant growth in the here and now:
Earnings per share
It's not possible to maintain growth rates quite that high forever, but analysts do expect that in 2022 AMD will continue expanding revenue by 54% and earnings per share by 57%.
AMD stock has declined by 41% from its all-time high amid the broader tech sell-off over the last six months, so now might be an opportune time to pick it up at a discount. So long as the company continues to innovate, it's a stock you can keep in your portfolio forever.
A bet on a better future
Jamie Louko (Nvidia): It's becoming increasingly clear that chips are becoming pillars of our future by powering nearly everything around us. Even today, there can be hundreds or thousands of chips in a car, and this trend will only accelerate as demand for chips rises to power vehicles, artificial intelligence (AI) engines, data centers, and even the virtual world. If you believe that any or all of these trends will accelerate and become mainstream a decade from now, you might want to consider owning the gold-standard chip manufacturer in these industries: Nvidia.
Nvidia is best known for graphic processing units (GPUs) that furthered the gaming industry, but it's since expanded into many other markets. The gaming space still makes up a substantial portion of revenue for the company: Q4 revenue jumped 37% year over year to $3.4 billion. Considering its leadership in GPUs, this growth will likely continue.
Gaming isn't the only area the company thrives in, however. It has a hold on the data center, AI, professional visualization, automotive, and even omniverse spaces. Combined, these industries allowed Nvidia's revenue to reach nearly $27 billion in fiscal 2022 (which ended Jan. 30, 2022), soaring 61% year over year. To put the icing on the cake, Nvidia is extremely profitable: The company generated nearly $9.8 billion in net income and $8 billion in free cash flow in the last fiscal year.
All of these spaces are likely to thrive, which means that Nvidia is poised to succeed alongside them. This will allow the company to continue generating immense cash flow, which it can heavily reinvest into capitalizing on these expanding markets.
Nvidia is trading at 56 times earnings -- a sky-high valuation for a company this mature. Even though it's growing its net income rapidly, this multiple is nothing to ignore. Therefore, while Nvidia might be one of the best semiconductor companies to buy now and hold forever, you should consider dollar-cost averaging into a position over time.
The leader in analog chips and embedded processors
Trevor Jennewine (Texas Instruments): Texas Instruments may not get the same attention as Nvidia, but its semiconductors are just as important. The company specializes in analog chips and embedded processors, and it serves 100,000 customers, primarily in the industrial, automotive, and personal electronics markets. For instance, Apple's iPhones are built using its technology. Better yet, every electronic device requires analog chips and most require embedded processors. And for both product categories, Texas Instruments is the market leader.
What's behind TI's success? It operates 15 manufacturing sites, and it handles most wafer fabrication, assembly, and testing internally. That allows the company a good deal of control over its supply chain, and it keeps costs down. Additionally, several of its wafer fabrication facilities use 300-millimeter technology, and chips built on 300-millimeter wafers cost about 40% less than those built on the 200-millimeter wafers used by most rivals.
Thanks to that competitive edge, Texas Instruments has delivered impressive financial results on a consistent basis. Revenue climbed 27% to $18.3 billion in 2021, and free cash flow rose 15% to $6.3 billion. Notably, free cash flow grew more slowly than revenue because the company is building several new 300-millimeter wafer fabrication plants, which should ultimately reinforce its competitive edge. The first new facility should enter production later this year.
Texas Instruments is well-positioned to maintain its momentum. Its business should grow as electronic devices continue to proliferate, and its investment in manufacturing technology should keep it ahead of the competition. That should lead to share-price appreciation over the long term. But the company has also increased its dividend at an annualized pace of 25% over the last 18 years; the quarterly payout currently sits at $1.15. So, whether you're looking for growth or passive income, this semiconductor stock fits the bill.