Microchip stocks are shares of companies that design, manufacture, and market the essential electronic components (integrated circuits, microprocessors, memory chips, etc.) used in virtually all modern electronic devices. For example, microchip companies design and manufacture the basic components that make up computing systems.
Microchip businesses are part of the technology sector, but they are also advanced engineering and manufacturing companies. As chips proliferate throughout all sectors of the economy, the producers of these basic tech building blocks are an increasingly important part of daily life around the globe.
As with any business closely tied to manufacturing, the microchip industry is cyclical. Booming sales in microchips (also referred to as semiconductors or simply as chips) are often followed by sharp slowdowns. Nevertheless, top companies in this space have produced some incredible market-beating returns over the long term and deserve investor attention.
Investing in microchip stocks
Global chip sales are expected to surpass $1 trillion by the end of this decade. Demand is soaring as developments in everything from household appliances to autos and data centers increase the need for various microchips and electronic components.
Chip manufacturers with fabrication plants (known as fabs) are spending billions to ramp up production in anticipation of this demand. Although sales from one year to the next can be volatile, there is massive growth potential in the decade ahead. With that in mind, here are 10 microchip stocks -- including chip designers, fabs, and fab equipment developers -- to consider.
Best microchip stocks to buy right now
| Name and ticker | Market cap | Dividend yield | Industry |
|---|---|---|---|
| Nvidia (NASDAQ:NVDA) | $4.5 trillion | 0.02% | Semiconductors and Semiconductor Equipment |
| Taiwan Semiconductor Manufacturing (NYSE:TSM) | $1.7 trillion | 0.94% | Semiconductors and Semiconductor Equipment |
| Broadcom (NASDAQ:AVGO) | $1.6 trillion | 0.71% | Semiconductors and Semiconductor Equipment |
| ASML (NASDAQ:ASML) | $489.8 billion | 0.58% | Semiconductors and Semiconductor Equipment |
| Qualcomm (NASDAQ:QCOM) | $176.2 billion | 2.14% | Semiconductors and Semiconductor Equipment |
| Advanced Micro Devices (NASDAQ:AMD) | $364.0 billion | 0.00% | Semiconductors and Semiconductor Equipment |
| Applied Materials (NASDAQ:AMAT) | $239.4 billion | 0.59% | Semiconductors and Semiconductor Equipment |
| Rambus (NASDAQ:RMBS) | $11.1 billion | 0.00% | Semiconductors and Semiconductor Equipment |
| Coherent (NYSE:COHR) | $28.9 billion | 0.00% | Electronic Equipment, Instruments and Components |
| Lattice Semiconductor (NASDAQ:LSCC) | $11.7 billion | 0.00% | Semiconductors and Semiconductor Equipment |
1. Nvidia
NASDAQ: NVDA
Key Data Points
Nvidia (NVDA +2.06%) is one of the most recognizable names in the semiconductor industry. The company got its start as a developer of specialized chips, called graphics processing units (GPUs), used in high-end video games. The company has remained true to its roots, and some of its revenue still comes from its video game segment, a ubiquitous form of entertainment around the world.
However, Nvidia has spurred a revolution in computing by extending the usefulness of GPUs beyond games. Nvidia hardware now powers artificial intelligence (AI) for businesses via its data center chip designs, including generative AI services like ChatGPT. Data centers are now its largest segment by revenue.
Artificial Intelligence
The company has pushed its technology even further and is powering devices with computing intelligence, including robotics in factories and warehouses, self-driving car features for automakers, and medical devices and research. Nvidia also has cloud subscription services that enable AI-fueled applications built atop its leading GPU business.
2. Taiwan Semiconductor
NYSE: TSM
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Slowly but surely, Taiwan Semiconductor (TSM +4.44%) has built itself into the world's largest manufacturer of microchips. It took the crown from Intel (INTC -0.92%) a number of years back, and steady investment in increasingly advanced chip fab capabilities has paid off.
Its fabs, most of which are in Taiwan (though a number are elsewhere, including in the U.S.), can handle the most complex chip designs (like those for the Apple (AAPL -0.67%) iPhone and Nvidia's data center chips).
Taiwan Semiconductor boasts more than half of the total market share of advanced microchip fabrication, and its constant investment in new and advanced production has kept demand steadily rising for years. It also pays a modest dividend to shareholders.
3. Broadcom
NASDAQ: AVGO
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Broadcom (AVGO +0.90%) is not a household name. However, the chip giant is quietly helping to power everything from 5G mobile network development to data centers and industrial equipment. What Broadcom lacks in high-octane growth, it more than makes up for in profitability.
Acquisitions have been key to Broadcom's profitability. Broadcom also has a policy of returning about half of the free cash flow it generated the previous year to shareholders via dividends, and it supplements dividends with share repurchases.
Microchip demand is exploding.
4. ASML
NASDAQ: ASML
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Chip fabs, such as Taiwan Semiconductor, Intel, and Samsung (SSNL.F +56.02%), are constantly in need of advanced equipment to manufacture the chips. One of the largest such industrial machinery makers (as measured by market cap) is Netherlands-based ASML (ASML +5.38%).
ASML makes EUV (extreme ultraviolet) lithography machines, which are responsible for forming the smallest of features on microchips, and its flagship machines fetch more than $200 million each. Due to its critical position in the semiconductor ecosystem, ASML has put up fantastic growth for years and is highly profitable.
The result has been a fantastic chip investment that has steadily increased both its share price and dividend payout for almost two decades.
5. Qualcomm
NASDAQ: QCOM
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Qualcomm (QCOM -1.96%) was a darling of the chip industry during the 2000s and 2010s, and rode the wave of mobility as smartphones went from a novel idea to a part of everyday life. The smartphone market has matured and isn't as much of a high-growth industry anymore. The development of 5G mobile networks, however, breathed new life into Qualcomm.
Almost every mobile phone on the planet has a piece of Qualcomm silicon in it. The company has diversified its business in recent years, designing parts for network equipment used to create mobile signals, as well as industrial devices and connected home appliances, virtual reality headsets, and a fast-growing automotive technology segment.
6. Advanced Micro Devices
NASDAQ: AMD
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NASDAQ: AMAT
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As one of the oldest names in the semiconductor industry, Applied Materials (AMAT +5.69%) has a deep understanding of microchips, how they're made, the materials used to produce them, and their role in an overall computing system. Chip fab equipment has been consolidated into a few major companies over the years. Lam Research (LRCX +4.16%) and KLA Corp (KLAC +7.70%) are two other major players.
When a chip manufacturer announces plans to update or expand a plant or break ground on a brand-new one, it's almost certain that Applied Materials will be selling them some equipment. The company also has a sizable recurring revenue stream from ongoing service to equipment purchased by customers.
8. Rambus
NASDAQ: RMBS
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NYSE: COHR
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Coherent (COHR +6.44%) makes money by manufacturing and selling a broad range of laser products, optical components, and materials used in various markets, including data centers, consumer electronics, industrial applications, and aerospace and defense. Coherent is an essential supplier to the semiconductor industry because it provides the technology and materials used to manufacture, test, and package advanced chips.
For example, Coherent is a major supplier of optics for the high-power lasers used in EUV lithography. The company also develops and manufactures specialized composite materials, such as reaction-bonded silicon carbide, which is used for structural components in semiconductor capital equipment.
Coherent is a vertically integrated supplier of datacom transceivers for data centers, too, including silicon photonics and other components.
10. Lattice Semiconductor
NASDAQ: LSCC
Key Data Points
Lattice Semiconductor (LSCC -0.06%) develops low-power, small-form-factor, field-programmable gate arrays (FPGAs) and related software tools. FPGAs are integrated circuits that can be configured and reconfigured after manufacturing, which allows them to be adapted to evolving needs and new functions, unlike traditional fixed-function chips.
The company's FPGAs are designed to handle AI and machine learning workloads on embedded systems, such as those found in sensors and other devices at the network's edge. Lattice specifically focuses on low-power FPGAs, which are crucial for battery-powered devices and systems where energy consumption is a concern.
In addition to hardware, Lattice provides comprehensive software and IP bundles to simplify the development process. Its products are used in various industries, including robotics, factory automation, smart devices, and vehicle systems.
A basic commodity of the digital era
Microchip demand is exploding thanks to increased adoption of technology across various industries and amidst the rise of artificial intelligence. The growth of computing technology has been ongoing for years. However, an acceleration in the trajectory of adoption has taken place as everything from new car models to industrial equipment requires more chips.
As technology proliferates throughout the economy and increases efficiency, semiconductors are quickly becoming a basic commodity for the digital era. Investing in microchip stocks holds a lot of promise as a result.
But as is the case with all technology, be mindful of investing for the long term (three to five years at least, but the longer, the better). Also, be sure to diversify your holdings among a number of top names in the space. There will be curveballs at times, but the microchip industry is poised to enjoy strong growth for many years to come.
Pros and cons of investing in microchip stocks
If you want to invest in microchip stocks, it's important to weigh the pros and cons before you put money to work.
Pros
- Integral to modern technology: Microchips are the fundamental components in almost all modern electronics, from smartphones and computers to electric vehicles and medical equipment. This makes them essential to the global economy and positions the industry for sustained growth.
- Driven by emerging technologies: The increasing demand for advanced technologies, such as AI, 5G, high-performance computing, and the Internet of Things (IoT), will continue to drive growth for the semiconductor industry.
- High barriers to entry: The massive capital requirements, significant R&D costs, and specialized expertise needed to produce advanced chips create a high barrier to entry.
Cons
At the same time, there are some downsides to consider and to factor into your overall risk thesis as you consider an investment in this sector.
- High volatility and cyclicality: The semiconductor industry experiences cycles of boom and bust, with demand fluctuating due to global economic conditions, technological shifts, and supply-and-demand imbalances. This volatility can lead to significant price swings.
- Intense competition: The market is fiercely competitive, forcing companies to innovate constantly to produce smaller, faster, and more efficient chips. Failure to keep up with these technological advancements can lead to lost market share and revenues.
- High capital expenditure and complexity: Chip manufacturing is extremely expensive and requires constant large-scale investments in manufacturing facilities and R&D. This creates cost pressures, and a few missteps in predicting demand can lead to costly inventory issues.
Factors to consider when choosing microchip stocks
Companies in the semiconductor industry follow different business models, all of which carry different risks and reward profiles that you ought to take into account before you hit the buy button on a specific stock. For example, integrated device manufacturers like Intel design, manufacture, and sell their own chips.
This model requires massive capital expenditures (capex) for building and maintaining fabrication plants, but successfully running fabs allows for greater control over the production process and potentially higher margins. Companies such as Nvidia and AMD focus solely on the design, marketing, and sale of chips while outsourcing manufacturing to third-party foundries.
The fabless model avoids the heavy capex burden, but these companies are highly dependent on foundries for production capacity and can be vulnerable to supply chain issues. Equipment manufacturers like ASML produce the highly specialized machinery that foundries use to manufacture chips.
Then there are companies like Taiwan Semiconductor, which operate solely as contract manufacturers producing chips for fabless companies and other firms. Foundries require extremely high capex but can benefit from the growing fabless market.
- Understand standard valuation metrics like the price-to-earnings (P/E) ratio for any microchip stock you evaluate for your portfolio. For cyclical industries like semiconductors, mid-cycle earnings or normalized margins can offer a more stable valuation perspective.
- Pay attention to a company's free cash flow (FCF) conversion rate, which indicates a strong ability to generate cash. This figure is typically calculated as FCF/EBITDA (earnings before interest, taxes, depreciation, and amortization) or FCF/GAAP (generally accepted accounting principles) net income.
- Make sure you understand the company's position in its specific market segment and the catalysts that play into its long-term growth story. For example, Nvidia is a leader in AI chips, while Micron is a market leader in memory products.
Dominant market players often have wider moats -- sustainable competitive advantages -- and tend to have higher margins. Investors should be sure to diversify their capital across a range of stocks and sectors to avoid becoming overly concentrated in any one particular area.
How to invest in microchip stocks
Here's the process you need to follow to put cash into your favorite microchip stocks.
- Open your brokerage app: Log in to your brokerage account where you handle your investments.
- Search for the stock: Enter the ticker or company name into the search bar to bring up the stock's trading page.
- Decide how many shares to buy: Consider your investment goals and how much of your portfolio you want to allocate to this stock.
- Select order type: Choose between a market order to buy at the current price or a limit order to specify the maximum price you're willing to pay.
- Submit your order: Confirm the details and submit your buy order.
- Review your purchase: Check your portfolio to ensure your order was filled as expected and adjust your investment strategy accordingly.
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Strategies for investing in microchip stocks
When investing in microchip stocks, it’s important to take a balanced approach and understand your risk tolerance level as you determine your preferred exposure to this space. Position your investments around secular growth trends that drive demand for advanced chips, such as AI data centers, 5G, and automotive technology.
Well-informed investors may find opportunities to establish positions in high-quality companies at lower valuations during industry downturns, but avoid overconcentrating your portfolio in a single stock or sector and be prepared for potential pullbacks.
A company with a high percentage of revenue dedicated to research and development (typically 10% to 25%) is vital to stay competitive in an industry that demands constant innovation. Be sure to understand the company’s customer concentration risk (if any) and the presence of long-term supply agreements, which can stabilize its revenue streams.
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