With the Nasdaq composite down 31% year to date, there has been a lot of doom and gloom when it comes to tech stocks. While it doesn't feel good to see your portfolio down in the short term, over the long term, sell-offs like these create the opportunity to buy some game-changing stocks at discounted prices.
Semiconductor stocks look particularly interesting in this light. These stocks have suffered in 2022 as the industry grapples with supply chain issues and fears that a recession will dampen demand. The VanEck Semiconductor ETF, which holds 25 semiconductor stocks, is down 38% in 2022. But over the long run, the picture looks as bright as ever. More semiconductors are going into automobiles, data storage, and industrial end markets. Industry bellwether Intel forecasts that annual spending on semiconductors will rise from $600 billion now to $1 trillion globally by 2030. Here are three top chip stocks that trade for attractive valuations, pay dividends, and serve end markets with significant growth ahead over the long term.
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1. Qualcomm
Qualcomm (QCOM -0.55%) is best known as the industry leader for supplying chips to the smartphone market, but there is a lot more to the company than that. It also supplies chips to a whole host of other industries, including the automotive market, which is going to grow massively in the future. In fact, the company just hosted an investor day specifically geared toward its strategy for automotive chips. At the event, Qualcomm outlined how its Snapdragon digital chassis triples the size of its auto business pipeline from $10 billion to $30 billion.Even better, it foresees a $100 billion total addressable market for itself in automotive by 2022. The company is even an intriguing under-the-radar metaverse play, as the chip supplier for Meta Platforms' Oculus headsets and with a $100 million Snapdragon Metaverse fund at its disposal to advance further into the space.
Sounds exciting, but a stock with this type of growth potential must trade at a super-expensive valuation, right? Believe it or not, Qualcomm's stock is cheap. It's cheaper than the broader market and trades for a single-digit forward P/E multiple of just 9.5. In addition to this attractive valuation, Qualcomm also pays investors a dividend that currently yields 2.5%. The stock is now down 36% from its 52-week high, and with an inexpensive valuation, a nice dividend payout, and an expanding presence in a massive market, it looks like a strong buy.
2. Lam Research
Lam Research (LRCX 2.38%) is a pick-and-shovel play on the semiconductor industry as it provides many of the machines and tools that semiconductor manufacturers need to produce chips. Therefore, it's crucial to the industry and should benefit for years to come as semiconductors are used in an increasing number of applications.
Only a few companies in the world can do what Lam Research does, but despite its importance in such a critical industry, the company is like Qualcomm in that shares trade at a very inexpensive level. They trade at just over 10 times forward earnings, which is well below the market average.
Lam also pays a dividend, which currently yields 1.8%. While this might not sound like enough to get dividend investors excited, Lam has all the makings of a great dividend growth stock. The company has more than tripled the size of its quarterly payout since the beginning of 2018. A low dividend payout ratio of about 23% means that Lam's dividend looks secure and that the company has plenty of room to keep growing the dividend and serving as a dividend growth stock in your portfolio for years to come.
3. Texas Instruments
While it isn't as cheap as Qualcomm or Lam Research, Texas Instruments (TXN -0.27%) looks palatable at a forward multiple of 18 times earnings. The company is a powerhouse in the field of analog chips. While analog may not sound as exciting as digital in an increasingly digitized world, analog chips are needed for all electronic devices. Texas Instruments explains that "every time a system is 'digitized,' there is a growing need and opportunity for analog chips." Analog chips are crucial to these digital devices because they manage voltage and measure real-world inputs for digital devices. These chips will become increasingly important as more digital chips go into products like automobiles and industrial applications, Texas Instruments' top two end markets by revenue. The company makes 80,000 different products and has 100,000 customers, which makes it well diversified and well suited to weather a downturn in any one end market.
Shares of Texas Instruments currently yield 3.1%, and the company also returns cash to shareholders via share repurchases. In fact, while it serves some exciting and growing end markets, my favorite thing about the company is its dedication to creating value for shareholders. Longtime CEO Rich Templeton says, "The best measure to judge a company's performance over time is growth of free cash flow per share, and we believe that's what drives long-term value for our owners." To this point, Texas Instruments has grown free cash flow per share 12% on an annualized basis since 2004, which is an outstanding track record. The company has increased its dividend payout for 18 years in a row, at a compound annual growth rate of 25%, and it has created value for shareholders by using share buybacks to reduce its share count by 46% over the same time period.
This year has been a slog for tech investors, but all three of these semiconductor stocks are profitable market leaders in exciting fields and are trading at attractive levels, and all three pay solid dividends. At a time of market turmoil, long-term investors who can see through the short-term noise and look at the bright long-term outlook can add these blue chip semiconductor stocks to their portfolios at discounted levels and watch them growth for many years.
