Semiconductor Stocks Are On the Rise: 3 Companies to Watch Right Now

Semiconductor stocks got clobbered this year, getting hit by the fallout from the U.S. Federal Reserve's interest rate hikes, China's weakening economy, a drop in consumer electronics purchases, and a growing risk of a recession in 2023. As measured by the iShares Semiconductor ETF, chip stocks are down over 31% in 2022 compared to a 29% decline for the Nasdaq Composite index.

Things were much worse in early October, but they eased somewhat as chip stocks went on a more than 30% rally over the last two months. Many of these rock-solid companies were getting unfairly punished, and shares were cheap. But even after this short-term run-up, those who make or work with tech's basic building blocks are still worth putting on your watch list.

Three Fool.com contributors like Lam Research (LRCX 2.72%), NXP Semiconductors (NXPI 2.01%), and Skyworks Solutions (SWKS 1.15%) right now. Here's why these three semiconductor stocks are worth a closer look right now.

Lam Research is about more than the current memory cycle 

Billy Duberstein (Lam Research): The semiconductor industry may go into a downturn next year, but investment in semiconductor production is likely to be steadier, given intense competition among leading foundries and developed nations building out capacity on their own shores due to national security concerns.

Still, many semi-cap equipment makers have sold off hard this year, especially those that help produce memory chips. The memory industry is in one of the worst slowdowns in recent history, as PC sales plunged and China's lockdowns limited China's memory purchases for a good part of the year.

Lam Research is a leader in high-end equipment for memory production, with large exposure to both NAND flash and DRAM. Of note, Lam makes equipment that enables vertical stacking, which is a key technology for modern NAND flash chips. Recently, leading NAND manufacturers have come out with modules stacked 232 layers high.

That's why the recent memory downturn hurt Lam's stock, as investors anticipate a big decline in memory equipment sales next year. While up about 50% off its October lows, Lam is still down 33% on the year, and its P/E ratio stands at a very reasonable 13 times trailing earnings.

A valuation like that still means investors anticipate significant softening in the memory investment space next year. However, Lam only got 52% of revenue from memory last quarter, with 39% coming from NAND flash customers. That's high overall, but much lower than the 78% memory concentration Lam had on the eve of the last memory bust in mid-2018.

The remaining foundry and logic segment should also hold up better, especially as Lam's etch and deposition tools are crucial to producing leading-edge chips. Lam recently garnered several new customer wins for gate-all-around transistor structures, which are just beginning to replace FinFET transistors in leading-edge logic chips, and should be a crucial technology going forward.

It's also not even a sure bet that memory sales will decline as much as many think. Memory industry leader Samsung recently said it would maintain its memory investments in the year ahead, instead of greatly reducing investment, as other producers have indicated.

Memory downturns have proven to be great times to pick up shares of Lam, a very high-quality and wide-moat business that earned a 73% return on equity, and which also seems set to grow above gross domestic product over the long term, given the solid growth prospects of the semiconductor industry.

Why pick one high-growth segment when you can have four?

Anders Bylund (NXP Semiconductors): Sometimes it feels like NXP Semiconductors has its hand in too many explosive growth markets. Many companies just pick one key focus and throw their entire weight behind it. The Dutch American maker of mixed-signal and high-performance microchips won't settle for a simple solution.

Instead, NXP is a global leader in such diverse fields as automotive computing, industrial automation, digital ID and authentication solutions, and the Internet of Things. There are so many tremendous growth markets on this company's dance card, it's hard to keep up.

The company can deliver robust growth even during a downturn with clients under macroeconomic pressure and industrywide manufacturing shortages. For example, in October's third-quarter report, NXP posted 20% year-over-year sales growth and 34% higher earnings per share. Revenue rose by double-digit percentages in all four of NXP's reporting segments, led by a 24% uptick in the automotive computing division.

And that's a snapshot taken at the bottom of a deep trough. Now imagine what NXP's results will look like when consumer demand springs back to life, the chipmaking slowdown eases up, and those macroeconomic troubles go away, as they are bound to do eventually. You don't want to be left on the sidelines when NXP's financial results really take off and share prices follow suit. 

A top mobile chipmaker branching out into new high-growth markets

Nicholas Rossolillo (Skyworks Solutions): Skyworks Solutions has long been a key supplier to Apple. In fact, Skyworks largely rode Apple's coattails to arrive where it's at today, designing critical mobile connectivity circuitry for the iPhone and other Apple products. But mobile connectivity can be found everywhere these days. Chips that enable a mobile network connection are in virtually every consumer electronic device out there. So Skyworks is working hard to diversify its reach into new frontiers. 

On that front, the company celebrated its one-year anniversary of acquiring the "infrastructure and automotive" segment from fabless chip peer Silicon Labs this past summer. The title of the Silicon Labs business that was purchased is self-explanatory, but Skyworks' plans for it were perhaps a little less clear. After all, Skyworks is primarily a smartphone and mobile device company. What would it be doing in the world of automotive?  

Turns out it was a good fit since Skyworks could integrate the infrastructure and automotive chip designs into its own portfolio. As industrial equipment and cars get electrified, they also tend to need more mobile connectivity circuitry. Skyworks was also able to start manufacturing these new chips at its existing fabs. It was just in time, too. After a boom from early 5G smartphone adoption in 2021 and into early 2022, Skyworks' mobile chip business has been starting to flag. But now it can make up the difference with applications for electric vehicles, industrial motor controls, power supply chips, and data center communications.  

The result? While other semiconductor companies with outsize exposure to smartphones have been reporting declining revenue, Skyworks grew sales 7% year over year in its fourth quarter of fiscal 2022. For the first quarter of 2023, revenue is expected to fall a modest 12%. But based on expectations for later in the year, the company's growth will resume in short order.

Even during this industry slump, Skyworks is highly profitable. Operating margin was nearly 28% last quarter. As of this writing, the stock trades for just over 12 times trailing-12-month earnings (or about 38 times trailing-12-month free cash flow). This looks like one cheap chip manufacturing stock right now.