Many semiconductor stocks slumped this year as President Donald Trump's tariffs, the escalating trade wars, and fears of a recession cast dark clouds over the booming sector. However, that pullback has also been creating attractive buying opportunities for investors who expect the semiconductor market to continue growing over the next few decades.
Below, I'll take a look at three of those stocks: TSMC (TSM +6.30%), ASML (ASML +6.97%), and Arm Holdings (ARM +13.63%). All of these companies provide crucial technologies for the chipmaking industry and will likely flourish as the expanding cloud and artificial intelligence (AI) markets drive the top chipmakers to produce even more advanced chips. That's why the stocks could be great ways for investors to make a fortune over the long term -- as long as they can tune out the near-term noise.
Image source: Getty Images.
1. TSMC
TSMC is the world's largest and most advanced contract chipmaker. Most of the top chipmakers -- including Nvidia, AMD, Qualcomm, and Apple -- rely on TSMC's foundries to produce their smallest, densest, and most power-efficient chips. Its closest foundry competitors are Samsung and Intel, but neither can match the size and density of TSMC's chips.
NYSE: TSM
Key Data Points
In its latest quarter, TSMC generated 59% of its revenue from the high-performance computing (HPC) market, which includes Nvidia's AI graphics processing units (GPUs), and another 28% came from the smartphone market. The growth of its HPC business has been offsetting the cyclical softness of the smartphone market.
As for its processes, TSMC generated 58% of its revenue from its smallest 5-nanometer (nm) and 3nm nodes during the quarter and will ramp up the production of its smallest 2nm chips in the second half of this year.
TSMC remains the linchpin and bellwether of the semiconductor industry, and it's a straightforward way to profit from that market's long-term growth. Its commitment to only producing its most advanced chips in Taiwan exposes it to some geopolitical risks, but it's been spreading out its manufacturing facilities across the U.S., Europe, and even mainland China.
From 2024 to 2027, analysts expect TSMC's revenue and earnings per share (EPS) to grow at a compound annual growth rate (CAGR) of 21% and 22%, respectively. Its stock looks like a bargain, relative to its growth potential, at 15 times forward earnings, and could easily command a higher valuation once the semiconductor market stabilizes again.
2. ASML
ASML is the largest producer of lithography systems, which are used to optically etch circuit patterns onto silicon wafers. It's also the only producer of extreme ultraviolet (EUV) lithography systems, which TSMC, Samsung, and Intel all use to manufacture their most advanced chips at their foundries.
NASDAQ: ASML
Key Data Points
ASML's current-generation "low-NA" EUV systems can produce chips as small as 2nm. Its newest "high-NA" EUV systems will be used to manufacture even smaller chips.
ASML's dominance in this crucial technology gives it nearly unlimited pricing power and an impenetrable moat. Its low-NA EUV systems cost about $180 million each, while its high-NA EUV systems cost around $380 million. Those massive systems require multiple planes to ship and are assembled on-site at the foundries.
ASML's growth slowed in 2024 as the company grappled with tighter export curbs against China -- where it's banned from selling its EUV systems, as well as some of its older deep ultraviolet (DUV) systems -- and uneven spending from some of the top foundries. But from 2024 to 2027, analysts expect the company's revenue and EPS to grow at a CAGR of 12% and 19%, respectively.
ASML's stock trades at a reasonable 25 times forward earnings and will continue growing, as long as chipmakers keep developing smaller and denser chips to support more sophisticated computing applications.
3. Arm Holdings
Arm designs power-efficient CPUs that consume less power than the x86 CPUs produced by Intel and AMD for PCs and servers. That lower power consumption made Arm CPUs better suited for smartphones, tablets, Internet of Things (IoT) gadgets, and connected vehicles. It's even being used in some notebook computers and servers.
Arm licenses those designs to leading mobile chipmakers like Qualcomm, MediaTek, and Apple. Its chip designs are now used in about 99% of the world's smartphones, and a lot of its recent growth was driven by the market's robust demand for its AI-optimized Armv9 designs.
NASDAQ: ARM
Key Data Points
Arm didn't initially produce any of its own chips, but earlier this year, announced it would start developing its own first-party chips and outsource production to TSMC. That move would turn Arm into a competitor to some of its biggest clients but could also easily undercut the competition because it wouldn't need to pay any licensing fees for its own designs. Its first-party brand recognition could also make it more appealing than third-party chips among OEMs.
From fiscal 2024 (which ended last March) to fiscal 2027, analysts expect Arm's revenue to grow at a CAGR of 23% and 81%, respectively. It isn't cheap at 55 times forward adjusted earnings but still has plenty of room to expand as more companies prioritize power-efficient designs over raw processing power.
