6 Best Semiconductor Stocks To Buy March 2023

Semiconductors are an integral part of virtually every industry. Here’s how to get exposed to them.

“Like sand through the hourglass, so are the days of our lives,” says NBC’s familiar opening days of our lives. In the decade before the popular soap opera premiered in 1965, Jack Kilby of Texas InstrumentsTXN
and intelINTC
Founder Robert Noyce, then Fairchild Semiconductor, created silicon integrated circuits and monolithic chips. More than six decades later, the devices are ubiquitous, and life in the 21st century seems not an hourglass but a series of encounters with an endless array of semiconductors.

It’s almost impossible to think of an industry, or any part of day-to-day activity, that isn’t refurbishing chips in one form or another. Computers, yes, but also all electronic communications, manufacturing, design, media, agriculture, government, business, transportation – you name it, semiconductors were there, did that and got away with the t-shirt.

According to Deloitte, as of 2020, an average passenger car contained $475 worth of chips, while a cellphone cost $340. They are big not just in everything but everywhere, effectively offering diversity through presence in economic and geographic sectors.

Fortunes have been made betting on the future of the semiconductor industry, but it can also be difficult. “Investing in the semiconductor industry can be volatile, and it’s important to carefully consider the risks and potential rewards before making any investment decisions,” said Sean August, CEO of fee-based private wealth management firm August Wealth Management Group.

Berkshire HathawayBRK.B
Charlie Munger recently remarked that it’s a “very peculiar industry” so driven by change that “you have to take all the money that you’ve made and throw all the money in at each new generation of chips, what you have previously earned”.

There are a relatively small number of companies that design and manufacture their own chips, as well as those that manufacture but do not design (foundry companies, so-called fabs, short for fabrication) and those that design but do not manufacture (fabless). . The giants like Intel and Texas Instruments have been around for decades and there are always newcomers.

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Here are some suggested semiconductor stocks and exchange-traded funds (ETFs) that might be worth your investment.

Taiwan Semiconductor Manufacturing Company Limited (TSM)

It’s almost impossible to talk about semiconductors without mentioning Taiwan Semiconductor Manufacturing Company, often called TSMC. Since its inception in the late 1980’s, TSMC has grown into one of the largest dedicated semiconductor foundries in the world.

“This is a company that designs and manufactures semiconductors for various applications, including artificial intelligence (AI), graphics, and mobile devices,” August says. “TSMC is one of the largest semiconductor foundries in the world and has partnerships with several leading technology companies.”

From its inception as a public company through fiscal 2022 — 31 years — TSMC has posted revenue CAGR (Compound Annual Growth) of 20.4% and net income CAGR of 23.7%, according to data from S&P Global Market Intelligence. Long-term debt of US$27.2 billion is offset by cash and cash equivalents of US$50.8 billion.

TSMC has continued to invest to provide the latest in semiconductor manufacturing to its customers, which include tech luminaries like AppleAAPL
AMD, QualcommQCOM
NvidiaSLIDE
and Sony.

lattice semiconductor
LSCC
(LSCC)

“One of our top semiconductor picks is Lattice Semiconductor, a company that specializes in the design and manufacture of low-power field-programmable gate arrays,” said Sam Boughedda, stock trader at AskTraders.com. Field-programmable gate arrays, or FBGAs, are semiconductors that companies can customize to their own needs, including MicrosoftMSFT
, which is customizing FPGAs in data centers running its Bing search engine to speed up performance, and parts of its Azure cloud computing platform. But the technology has the flexibility and power to perform many other types of functions.

“Lattice benefits from its solutions for new PC designs running on low-power FPGAs, providing customers with accelerated AI experiences, longer battery life, and collaborative conferencing experiences,” added Boughedda. “They also have flexible sensor connectivity and processing. In an increasingly AI era, the company’s FPGA innovation should benefit.”

In fiscal 2022, the company’s revenue ($660.4 million) and net income ($178.9 million) increased 28.1% and 27.1%, respectively, year over year. Gross profit margin percentages have increased from 56.1% in 2017 to 68.5% in 2022.

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AEHR Test Systems (AEHR)

Semiconductor manufacturing does not exist without expensive and esoteric tools, and this is the market AEHR serves: silicon carbide semiconductor wafer testing. Silicon carbide is a specialty semiconductor material that is widely used in power electronics. The technology is particularly well-suited to electric vehicles because it can handle higher power than similarly sized silicon packages.

“AEHR has a few of the four largest [semiconductor companies] as customers; with more in the wings,” says Gene Inger of Inger Letter. “Note that both Goldman Sachs and Fidelity have recently built significant positions in AEHR.” As Inger notes, there is also no long-term debt, giving the company flexibility. Share prices are near all-time highs and he believes the company is “undervalued.”

SkyWater Technologies (SKYT)

Another Inger recommendation is SkyWater, a spin-off from Cypress Semiconductors. The company has a number of interesting attributes, including, as Inger notes, “serious contracts for ‘radical’ or radiation-hardened chips for NASA and several military contractors.” The company also has a factory in Minnesota and has a public-private partnership with Osceola County in the state took over the operation of one in Florida. The company is positioned as a DMEA-accredited Trusted Foundry company. Accreditation gives SkyWater a head start on the Department of Defense’s work. Recent Biden White House guidelines focusing on US-manufactured government projects should also provide additional benefits. As Inger notes, “They are 100% domestic and a participant who will benefit from the Chips Act in the future.” SkyWater also offers unusual and custom products for automotive, industrial and medical applications.

The last fiscal year became a turning point for the company as fourth-quarter revenue rose 69% year over year, and while it posted a loss of 3 cents per share, it was a positive surprise from the 11-cent loss analysts were expecting cents . There’s obviously risk in a company that isn’t profitable, but enterprise value at the end of 2022 was 2.4 times total sales, which is a low multiple, and analysts’ median price target of $18 is still above current ones Priced early 2023. If management can achieve projected growth, this could be a sleeper or possibly an acquisition target at some point.

NVIDIA (NVDA)

Nvidia started out as a semiconductor company making graphics processing units (GPUs). But the supposedly specialized hardware actually means chips that can perform complex numerical calculations at lightning speed. That opens up a world of other uses. Sean August mentions gaming, automotive, and data centers as three industries in which the company operates. Others include complex design and visual rendering, virtual worlds, and high-performance computing. Another important area for Nvidia is artificial intelligence, including applications such as uniquely identifying users and machines on a network to detect cyber threats, and developing automated services such as audio transcription or virtual assistants.

With the exception of 2020, revenue and net income growth has been largely strong in recent years. With a current ratio of 4 to 8 over the past few years, ROE of 13.6% to 22.9%, ROE of 26% to 49.3%, and gross margins of 59.9% to 64.9%, NVDA is a strong performer.

iShares PHLX Semiconductor ETF (SOXX
SOXX
)

An ETF can be a great way to gain exposure to a specific industry or segment while still getting industry diversity that you’re unlikely to replicate with individual investments. August proposes the iShares PHLX ETF, “which includes companies that design, manufacture and sell semiconductors,” he says. “The ETF has exposure to a broad range of semiconductor companies, including those focused on AI, graphics and mobile devices.”

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