The semiconductor industry has produced some of the biggest growth stocks over the past 40 years, generating huge wealth for shareholders. The semiconductor industry is a $600 billion industry that is set to continue to grow over the next decade, but investors need to choose wisely. The emergence of artificial intelligence (AI) is giving some companies an advantage while exposing the weaknesses of others.
Here are two semiconductor stocks to buy now and one industry heavyweight to avoid.
Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (NYSE:TSM)TSMC is one of the world’s leading semiconductor manufacturers and operates as a foundry, making chips for other companies such as Nvidia and Advanced Micro Devices. (NASDAQ: AMD).
The company’s expertise in cutting-edge processing nodes has translated into a profitable business with strong operating margins of 42%, more than double the S&P 500 average of 17%.
TSMC’s shares have soared more than 82% over the past year. The company’s second-quarter dollar-denominated revenue rose 33% year over year. Management expects third-quarter demand to be driven by smartphones (it is a key supplier to Apple) and AI-related chips.
The company is well positioned for further growth as businesses begin to deploy AI capabilities in mobile devices. With the seasonal slowdown in smartphone sales contributing to TSMC’s weakest market quarter in the second quarter, improving demand will add to the momentum the company is experiencing in the high-performance computing sector. In that regard, Apple Intelligence, which will be launched alongside the iPhone 16 this fall, will be a key catalyst.
TSMC has experienced high annual sales and profit growth for many years. $10,000 invested 10 years ago would be worth over $100,000 today with dividends reinvested.
This remains an excellent buy, considering the stock trades at a forward price-to-earnings (P/E) ratio of 25, compared with Wall Street’s long-term earnings growth forecast of 26% per year. If this forecast proves correct, the stock could double in value within three years, assuming it trades at the same P/E, given that it is close to the S&P 500 average.
Advanced Micro Devices
The second chip stock to buy right now is Advanced Micro Devices, one of TSMC’s major customers. Naturally, TSMC’s strong growth reflects rising demand for semiconductors among its large customer base, which is good news for AMD shareholders.
After a recent selloff, shares have risen 26% over the past year. AMD has seen accelerating growth in its data center division, which has been a key driver of the stock price. Revenue from the division doubled year over year to $2.8 billion, accounting for nearly half of the company’s total revenue.
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AMD also saw strong improvement in its client division, which includes sales of chips for consumer PCs, with client revenue up 49% year over year last quarter thanks to robust demand for Ryzen processors.
The momentum suggests AMD is well positioned for growth in the AI era. Management expects its data center graphics processing units (GPUs) to generate $4.5 billion in revenue for the full year, a figure that has increased over the past two quarters. AMD’s Ryzen chips are also expected to see strong demand as AI-enabled PCs launch over the next 12 months.
The stock currently has a forward P/E ratio of 40, which seems reasonable given Wall Street’s projections for long-term earnings growth of 43% per year. Assuming AMD lives up to these expectations, the stock should be a very high-return investment.
Why investors should avoid Intel
Intel (Nasdaq: INTC) The company has lost market share to AMD and its shares have slumped in recent years, falling to their lowest in years after the company announced it was suspending its dividend following a string of losses over the past year and a weak second quarter.
Revenues for the second quarter were down 1% year over year. Revenues from its client computing business grew 9%, while revenues from its data center and AI business declined 3% year over year.
These figures are alarming when compared to the strong growth of TSMC, the benchmark for industry demand. Intel is losing its innovative edge at a time when other companies are facing exploding demand from the AI arms race.
To its credit, Intel has been executing on plans to regain industry leadership: The company recently began production of its next-generation AI chip, Lunar Lake, which is aimed at meeting demand for more powerful chips for Microsoft’s new Copilot+ PC.
But the AI server market is a key battleground for the chip industry, and AMD is on track to overtake Intel in data center revenue in the third quarter. Intel appears to have painted itself into a corner by pouring money into expanding its foundry business, which generates a third of its revenue, while AMD remains focused on investing in building out its long-term roadmap for high-performance processing technologies.
Intel’s collapse highlights the importance of investing in companies with growing demand for their products, which is why investors should avoid the company’s stock for now and stick to the strongest growing companies, such as Taiwan Semiconductor and Advanced Micro Devices.
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John Ballard has investments in Advanced Micro Devices and Nvidia. The Motley Fool has investments in and recommends Advanced Micro Devices, Apple, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: buy January 2025 $45 calls on Intel, buy January 2026 $395 calls on Microsoft, sell August 2024 $35 calls on Intel, and sell January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
2 Semiconductor Stocks to Buy Now and 1 to Avoid at All Costs was originally published by The Motley Fool.
