Investing in Microchip Stocks

Microchip companies design and manufacture the basic components that make 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 a cyclical one. 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

Tech researcher Gartner (IT 0.61%) said that revenue from the chip industry in 2022 grew 1% from the previous year, surpassing $600 billion worldwide for the first time. A cyclical downturn began the second half of last year, though, and is expected to persist through the first half of 2023.

Longer-term, 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 to 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. Legislation like the U.S. CHIPS Act and the European Chips Act will provide tens of billions of dollars worth of funding to bolster these fabs. 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 seven microchip stocks (from chip designers to fabs to fab equipment developers) to consider for 2023 and beyond.

Best microchip stocks to buy right now

Best microchip stocks to buy right now

1. Nvidia

1. Nvidia

Nvidia has quickly become one of the most recognizable names in the semiconductor business. The company got its start as a developer of specialized chips called GPUs (graphics processing units) used for high-end video games. The company has remained true to its roots, and some one-third 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.

The company has pushed its tech even further and is powering devices with computing intelligence. This includes robotics in factories and warehouses, self-driving car features for automakers, and medical devices and research.

More than just a microchip company, Nvidia made a big foray into software with cloud subscription services that enable AI-fueled applications built atop its leading GPU business. Nvidia is a premium-priced stock among its chip peers, and for good reason. It is one of the most promising companies in the AI computing movement.

2. Taiwan Semiconductor

2. Taiwan Semiconductor

Slowly but surely, Taiwan Semiconductor has built itself into the world's largest manufacturer of microchips. It took the crown from Intel (INTC 0.61%) 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, but there are a number of them elsewhere, including in the U.S.) can handle the most complex chip designs around (like those for the Apple (AAPL 0.51%) iPhone and Nvidia's data center chips). Taiwan Semiconductor boasts more than half of the total market share of advanced microchip fabrication.

As a manufacturing giant, Taiwan Semiconductor would normally be considered a highly cyclical stock. Many manufacturers, including fellow chip fabs, are prone to ebbs and flows in sales from year to year. But Taiwan Semiconductor's constant investment in new and advanced production has kept demand steadily rising for years. Over the past decade, the chipmaking giant has gone from just $17 billion in annual sales to almost $76 billion (through the 12 months ended in March 2023).

Taiwan Semiconductor has managed to maintain an operating profit margin of no less than 30% over the past 10-year stretch. 2023 will be bumpy due to a global economic slowdown. However, the company is still reinvesting to maintain its production prowess and also pays a modest dividend to shareholders. If you're looking for a long-term play on microchip expansion, Taiwan Semiconductor is a good place to start.

3. Broadcom

3. Broadcom

Broadcom 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. As its name suggests, it supplies a broad range of communications parts and components that companies need across many sectors of the economy.

Although Broadcom is not the highest-growth chip business on this list, it has expanded slowly and steadily for years. What it lacks in high-octane growth, it more than makes up for in profitability. The company generated a whopping free cash flow profit margin of almost 49% in 2022.

Acquisitions have been key to Broadcom achieving this profitability. It reached a $61 billion deal to acquire cloud computing infrastructure giant VMware (NYSE:VMW), which is currently pending regulatory approval. If approved, it would be one of the largest mergers so far this decade.

Broadcom 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. If you're looking for investment income from a microchip stock, Broadcom might be your ticket.

4. ASML Holding

4. ASML Holding

Chip fabs like Taiwan Semiconductor, Samsung, and Intel are in constant need of advanced equipment to actually manufacture the chips. The largest such industrial machinery maker (as measured by market cap) is Netherlands-based ASML Holding. Few people have heard of ASML, but its most advanced equipment is responsible for forming the smallest of features on the world's most powerful microchips.

ASML is the only company that makes EUV (extreme ultraviolet) lithography, its flagship machines that fetch upwards of $200 million apiece. Because of its critical position in the semiconductor ecosystem, and thus the world economy itself, ASML has put up fantastic growth for years, and it's 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. If you love dividend stocks that consistently increase their payout, ASML Holding is a great semiconductor stock to consider.

5. Qualcomm

5. Qualcomm

Qualcomm was a darling of the chip industry during the 2000s and 2010s, riding 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, so an initial surge of 5G phone upgrades lifted the company's revenue higher early in the pandemic. But Qualcomm isn't just a smartphone microchip designer. Qualcomm has diversified its business in recent years and also designs parts for the network equipment used to create mobile signals, as well as industrial devices and connected home appliances, virtual reality headsets, and a fast-growing auto technology segment. Each of the new businesses will also benefit from new 5G networks.

Qualcomm has a tight grip on the global mobile market, and it's using its strength to expand its scope of work. As it does so, the company is finding new ways to eventually rekindle its revenue growth. The chip downturn of 2023 is putting a delay on that resumption of growth. However, Qualcomm is nonetheless an established leader in new areas of mobile connectivity.

6. Advanced Micro Devices

6. Advanced Micro Devices

Advanced Micro Devices (known as AMD) has historically played second fiddle to Intel. But back in 2010, AMD offloaded its chip fab segment -- now GlobalFoundries (GFS 0.24%) -- to focus solely on chip design. The move has paid off. Although AMD is still far smaller than Intel, it has been picking up serious market share in both the data center and personal computing space.

Data centers -- the basic computing units of the cloud -- have been an especially lucrative market for AMD. CPUs (central processing units), an integral part of data centers, are in increasing demand as remote work has become more common and services delivered via the internet become routine. AMD has won over lots of customers with its leading microchip designs, benefiting both from a secular growth industry and taking market share from long-time rival Intel.

As it has grown, AMD has also gotten more efficient. Just a few years ago, the company still struggled during slow years and would frequently report steep operating losses. But the new AMD could be far more profitable (it posted an operating margin of over 20% for much of 2022). Its megamerger with Xilinx is creating a floor for profitability, giving AMD room to invest more aggressively in research and development. 2023 will be a test for the new AMD's ability to weather a severe downturn, but this former underdog is now a top name in the computing business.

7. Applied Materials

7. Applied Materials

As one of the oldest names in the semiconductor industry, Applied Materials has a deep understanding of microchips, how they’re made, the materials used to make them, and how they fit into an overall computing system. Its understanding of microchips has helped Applied Materials become one of the top developers of equipment that chip fabs need to manufacture microchips and other electrical components.

Chip fab equipment has been consolidated into a few major companies over the years. Lam Research (LRCX -0.25%) and KLA Corp (KLAC 0.87%) are two other major players. The consolidation has made Applied Materials a great bet if you think semiconductor demand will continue to rise over the next decade or two. When a chip manufacturer announces plans to update or expand a plant or break ground on a brand-new one, there’s an almost a certain chance 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.

Thanks to industry consolidation, Applied’s business model has become far less cyclical than in times past. Revenue has been steadily on the rise for years, and so have profit margins; the company’s operating profit was more than 30% in 2022. Many countries are trying to establish more localized chip fabrication capabilities because of the COVID-19 pandemic. For example, the U.S. CHIPS Act and the European Chips Act have tens of billions of dollars earmarked to expand chip manufacturing. This is great news for Applied Materials as they can amass a large backlog of orders for their equipment. This helps to make the company’s stock a good way to invest in microchip fabrication growth in the coming years.

Related investing topics

A basic commodity of the digital era

Microchip demand is exploding in the wake of the pandemic. Computing technology growth was already happening. But an acceleration in the trajectory of adoption has taken place as everything from new car models to industrial equipment needs more chips. As tech proliferates throughout the economy and creates more 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 tech, 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.