Many semiconductor stocks slumped this year as investors fretted over concerns about slowing sales of PCs and smartphones, the potential overproduction of chips in response to the global chip shortage, and more conservative enterprise spending in a tougher macro environment. Rising interest rates exacerbated that pressure by driving investors away from higher-growth tech stocks.

As a result, the Philadelphia Semiconductor Sector index has declined about 24% this year as the S&P 500 retreated just 12%. However, investors who can tune out the near-term noise should still pick up some semiconductor stocks as the bulls shun the sector -- since the global demand for new chips will likely pick up again and accelerate over the long term.

An engineer tests a silicon wafer.

Image source: Getty Images.

I personally believe these three well-balanced semiconductor stocks are great ways to profit from that secular trend: Taiwan Semiconductor Manufacturing (TSM -0.36%), which is more commonly known as TSMC, the Dutch semiconductor equipment maker ASML Holding (ASML 0.59%), and the diversified American chipmaker Texas Instruments (TXN 0.03%).


TSMC is the largest and most technologically advanced contract chipmaker in the world. Its 5nm and 7nm nodes are currently used to manufacture the world's smallest, densest, and most power-efficient chips for "fabless" chipmakers like Apple, Advanced Micro Devices, Qualcomm, and Nvidia. It plans to start mass producing 3nm chips later this year and move on to 2nm chips by 2025.

TSMC generated 51% of its revenue from its 5nm and 7nm nodes in the second quarter, and that percentage should continue to rise next year. It still generated 38% of its revenue from the smartphone market -- which leaves it exposed to a cyclical downturn in handset sales -- but it's also diluting that concentration by accepting more orders from the HPC (high-performance computing), data center, automotive, and Internet of Things (IoT) markets.

Intel (INTC -0.62%) wants to catch up to TSMC in the process race by 2025, but TSMC plans to maintain its lead by boosting its annual capex by $10 billion to $40 billion this year. Even with its forthcoming subsidies from the CHIPS Act, Intel will likely struggle to match TSMC's spending power.

TSMC is bracing for slower near-term growth as the chip sector faces a cyclical slowdown, but its stock is still cheap at 13 times forward earnings and its growth should eventually accelerate again.


TSMC is able to maintain its technological superiority because it started installing ASML's top-tier EUV (extreme ultraviolet) photolithography machines long before Intel and other major foundries.

Photolithography systems are used to etch circuit patterns onto silicon wafers, and ASML is now the industry's market leader. It's also the only producer of EUV systems -- which cost up to $200 million each and are required to manufacture the smallest and densest chips. Its next-gen "high-NA" EUV systems will enable TSMC and other foundries to eventually manufacture chips beyond the 2nm node.

ASML's monopolization of a key chipmaking technology makes it a linchpin of the semiconductor sector and gives it tremendous pricing power. Like TSMC, it expects to experience a near-term slowdown as the market's appetite for new chips wanes.

Yet ASML still expects to generate 24 billion to 30 billion euros ($31 billion) in revenue by 2025 -- based on its "low" and "high" expectations for the chip market -- which implies its top line could grow at a compound annual growth rate (CAGR) of up to 13% over the next four years. Its stock isn't cheap at more than 40 times forward earnings, but its market dominance easily justifies that premium valuation.

3. Texas Instruments

Like Intel, Texas Instruments is an integrated device manufacturer (IDM) which manufactures most of its own chips instead of outsourcing them to third-party foundries like TSMC. It also produces most of its chips domestically -- which qualifies it for big subsidies under the CHIPS Act.

However, TI doesn't manufacture high-end chips like Intel or TSMC. Instead, it mainly produces lower-end analog and embedded chips which are used for power management and wireless features. These chips cost less to manufacture than more advanced chips, but they're just as important and widely used by TI's automotive, industrial, personal electronics, communications, and enterprise customers.

TI generates most of its growth from the automotive and industrial markets -- which together accounted for 62% of its revenue last year -- so it isn't heavily exposed to the recent headwinds in the PC and smartphone markets. It's also been upgrading its plants from 200mm to 300mm wafers to reduce the costs of its unpackaged parts by about 40%.

TI's broad diversification, scale, and consistent gross margin expansion enable it to generate plenty of cash for big buybacks and dividends. That's how it reduced its share count by 46% between 2004 and 2021 while raising its dividend annually for 18 straight years. It's also grown its free cash flow per share at an average annual rate of 12% during that same period.

In other words, TI is a great blue-chip stock to buy and hold for investors who simply don't want to worry about all the cyclical headwinds or the ongoing capex wars between the top-tier chipmakers.