Two semiconductor stocks that could surge

Semiconductors are essential to modern technology, and the pandemic has prompted many individuals and businesses to go digital, accelerating semiconductor adoption. The surge in demand for microchips has continued even after the pandemic.

The introduction of generative artificial intelligence (AI), the Internet of Things (IoT), 5G, autonomous vehicles, etc. are all contributing to the continued advancement of the semiconductor industry.

The good news is that you can benefit from this rapid growth. The semiconductor sector contains some solid growth companies with rapidly increasing revenues and profits. By investing some of your money in these stocks, your portfolio can enjoy impressive capital gains over the long term. These companies have dominant market shares and business models that allow them to achieve sustainable growth.

Here are two attractive semiconductor stocks that could see their share prices soar over the next few years.

Image credit: Getty Images.

1. Overview

overview (SNPS 1.97%) Synopsys is a market leader in the design and testing of complex chips, as well as the models and processes companies use to manufacture these chips. As advances in IoT, AI and 5G make silicon chips increasingly sophisticated, demand for Synopsys’ services is growing. Foundries need guidance on the intricacies of these designs to manufacture these chips efficiently.

The company has shown steady growth, with sales rising from $4.2 billion in fiscal 2021 (ending Oct. 31) to $5.8 billion in fiscal 2023. Net income grew from $757.5 million to $1.2 billion over the same period. The company also generated positive free cash flow, averaging $1.5 billion over the past three years.

This strong performance continued in the first nine months of fiscal year 2024. Revenues increased 16.6% year over year to $4.5 billion, and operating income increased 23% to $1.0 billion. Net income increased 30% year over year to $1.1 billion, and free cash flow was positive $725.4 million.

Management is forecasting strong momentum and expects full-year revenue to grow 15% year over year to a new record in fiscal 2024. The company’s longer-term goals include double-digit revenue growth, free cash flow margins in the mid-30s, and earnings per share in the mid-teens.

Sasheen Ghazi, who took over as CEO in January, said that design cycles are shortening while chip complexity is increasing, both of which are positive signs for Synopsys. AI is driving demand for high-performance computing in data centers, smartphones and PCs. Innovations that accompany evolving AI needs will require more complex chipsets, which should expand the company’s business volume.

Synopsys acquired Ansys in January for approximately $35 billion to expand its product and technology portfolio and complement its businesses.

With this acquisition, Synopsys expects its total addressable market to increase by 50% to approximately $28 billion, representing annual growth of approximately 11%, creating significant business opportunities for the combined company.

2. NVIDIA

NVIDIA (NVDA 3.00%) is the market leader in graphics processing units (GPUs) with a market share of around 88% in 2024. GPUs are ideal for AI, machine learning, and other applications.

Nvidia has grown at breakneck speed over the past three years, and management believes this is just the tip of the iceberg: Revenue is expected to more than double from $26.9 billion in fiscal 2022 (ending Jan. 31) to $60.9 billion in fiscal 2024. Net income is expected to triple from $9.8 billion to $29.8 billion over the same period.

Free cash flow is expected to grow from $8.1 billion in fiscal 2022 to $27 billion in fiscal 2024.

In the first half of fiscal 2025, this strong momentum continued. Revenue more than doubled year over year to $56.1 billion, while net income soared to $31.5 billion from $8.2 billion a year ago. Free cash flow for the first half of fiscal 2025 is $28.5 billion, already exceeding the full-year fiscal 2024 total. The company is also paying a quarterly cash dividend of $0.01 per share.

CEO Jensen Huang said demand remains very strong as data centers seek to upgrade for faster computing and generative AI.

Nvidia’s next-generation GPU, Blackwell, will not be able to ship in Q2 2024 due to a manufacturing defect, causing much grief to many customers who were relying on the new GPU to meet their AI requirements.

But Huang assured buyers that Blackwell’s chips are currently in full production and shipments will start in the fourth quarter of this year.

Bright outlook for semiconductor sales

As pent-up demand for electronic products surged during the pandemic, semiconductor sales experienced a cyclical year-over-year decline in 2023. The Semiconductor Industry Association said global sales fell from a peak in 2022 to $526.8 billion, down 8.2% from a year earlier.

But there are strong indications that the industry will bounce back and continue to grow in 2024 and 2025. World Semiconductor Trade Statistics, a group that tracks the industry, predicts that global semiconductor sales will grow 16% year-over-year in 2024 and 12.5% ​​year-over-year in 2025, reaching $687 billion.

SEMI, which represents more than 300 companies in the industry, predicts that global sales of semiconductor manufacturing equipment will reach $109 billion this year, up 3.4% from last year, and reach $128 billion in 2025, up 17% from last year.

These forecasts bode well for Synopsys and Nvidia, both of which expect strong demand for their products and services.