Semiconductors power a wide range of devices, including computers, game consoles, phones, automobiles, and industrial machines, and many of these platforms require a growing number of chips with each upgrade.
These upgrades, which boost devices’ processing power or wireless connectivity, are currently causing a global disk shortage that could continue for the rest of 2021.
According to the research firm EMR, the global semiconductor market could then grow between 2021 and 2026 with a compound annual growth rate of 10%. The stable demand suggests that most investors should own at least a few slide stocks, but the complex market can be daunting for newcomers.
So today I am going to guide you through four of the most important chip manufacturing companies in the world and will indicate why these could be good investments for the next decade.
Image Source: Getty Images.
1. Taiwan semiconductor manufacturing
In the past, many disc makers manufactured their chips with their own manufacturing plants, also known as factories or foundries. But it is becoming more expensive and difficult to produce smaller and more powerful nanometer chips, and many chipmakers have finally adopted a “fabless” model by outsourcing the manufacturing process to a third-party foundry.
Today there are only three foundries – Taiwan Semiconductor Manufacturing (NYSE: TSM), Samsung, en Intel – can produce the world’s smallest chips. TSMC is the largest and most technologically advanced of the three, and fabless chipmakers like AMD, NVIDIA (NASDAQ: NVDA), Qualcomm (NASDAQ: QCOM), en appeal (NASDAQ: AAPL) everyone relies on its plants to manufacture their latest 5 nm and 7 nm chips.
TSMC’s revenue and earnings increased by 25% and 50% respectively last year as orders poured in. Analysts expect its revenue and earnings to grow by 20% and 17% respectively this year, even if it increases its capital increase by up to 63% to maintain its lead in the ‘process race’ to create smaller chips.
2. ASML Holding
TSMC may be the most important contract disc maker in the world, but it can not manufacture its discs ASML Holdingsay (NASDAQ: ASML) lithography machines, which print circuit patterns on wafers.
Image source: ASML.
The Dutch company has about 90% of this market and its latest lithography systems EUV (extreme ultraviolet) are used to produce 5 nm and 7 nm chips. Its biggest customer is TSMC, so it will have to directly benefit from the latter’s rising capital tax over the next decade.
Over the next few years, ASML will introduce even more advanced EUV systems, called high-NA systems, to produce 3nm and 2nm chips between 2022 and 2025. The roadmap aligns directly with TSMCs, and it will enable ASML to remain one of the best in the industry key equipment manufacturers for the foreseeable future.
ASML’s revenue and earnings increased by 18% and 38% respectively last year. Analysts expect its revenue and earnings to grow by another 32% and 41% respectively this year, as it benefits from rising demand for new chips.
NVIDIA
NVIDIA (NASDAQ: NVDA) is the world’s largest producer of discrete GPUs. GPUs are often associated with gaming, but they are also used to exploit cryptocurrencies and process machine learning tasks in data centers.
But that’s not all. NVIDIA also plans to buy Arm Holdings Soft bank, which offers the slide designs for most of the world’s mobile chips. If approved, NVIDIA will receive royalties and licensing fees from every arm-based chip maker worldwide – including Apple, Qualcomm, MediaTek, en Huawei.
NVIDIA’s revenue and adjusted earnings increased by 53% and 73% respectively last year as sales of its gaming and data center chips increased. Wall Street analysts expect NVIDIA’s revenue and earnings to rise by 33% and 34% respectively this year, as it continues to benefit from the secular upwind.
These estimates may also be too low if the proposed takeover of Arm, which still faces many regulatory challenges, is approved ahead of schedule. No matter what happens, the demand for NVIDIA GPUs should continue to rise as games become more graphically demanding and AI tasks more complicated.
4. Qualcomm
Last but not least, Qualcomm is an evergreen disc maker for two simple reasons. First, it is the largest mobile chipmaker in the world with a wide margin. Its Snapdragon SoCs (system on chips) combine arm-based CPUs, GPUs and baseband modems into cost-effective bundles for smartphone makers.
Second, Qualcomm owns the largest portfolio of wireless patents in the world, selling a slice of every smartphone worldwide. The dominance of the mobile chip and licensing markets has made it a popular target for antitrust regulators in the past, but it has resolved most of these issues and is still poised to benefit from the growth of the 5G market.
Qualcomm’s revenue and adjusted earnings grew by 12% and 18% respectively last year. Growth rates were stable, but analysts expect revenue and earnings to rise by 43% and 74% respectively this year as smartphone makers sell more 5G devices. The company also expects the expansion of other markets, including automated telematic chips, to complement the growth.
The conclusion
The semiconductor market may seem confusing at first, but it becomes easier to understand if you break the pieces apart. TSML, ASML, NVIDIA and Qualcomm are all solid start-up stocks in this sector, and they will all have to rise over the next decade amid rising demand for more powerful chips.
This article represents the opinion of the author, who may not be in agreement with the ‘official’ recommendation position of a Motley Fool premium advisory service. We are furry! Questioning an investment thesis – even one of our own – helps us all to think critically about investments and to make decisions that help us become smarter, happier and richer.