In this post, we will take a look at ten growth stocks from the semiconductor industry.
The semiconductor industry is one of the hottest topics in the technology sector these days, particularly due to the global chip shortages in the wake of the COVID-19 pandemic. Right now, the bulk of global semiconductor output, particularly that for advanced chips that go into the latest products comes from a handful of firms. These firms are then supplemented by those who target older technologies, and they have a diverse supplier base that provides them with support such as wafers and design tools.
Semiconductor Industry Outlook
According to a report by Fortune Business Insights, the global semiconductor sector was worth $425 billion in 2020. Due to the increased demand in the wake of the ongoing pandemic, which saw a large percentage of the global population shift to remote working and entertainment — spurring demand for consumer technology products such as laptops and smartphones — Fortune Business Insights believes that the compound annual growth rate (CAGR) for the chip sector will nearly triple for the 2021-2028 period when compared to the CAGR for 2017-2019. The research firm believes that when compared to the 3.3% CAGR for 2017 to 2019, the 2021-2028 CAGR will stand at 8.6%.
Another report from IC Insights, which specializes in analyzing the semiconductor sector, also highlights the bright future for the sector. The report, published in November 2021, outlines that the top 25 semiconductor firms in the world will see their revenue grow by at least 39% annually in 2021. Leading the pack here is the San Diego, California design firm Advanced Micro Devices, Inc. (NASDAQ:AMD), with estimated revenue growth of a staggering 65% for 2021.
Some of the firms that sit right at the heart of this optimism include the Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM), NVIDIA Corporation (NASDAQ:NVDA), and QUALCOMM Incorporated (NASDAQ:QCOM). These companies are expected to benefit from the advances in lithography, the uptick in machine learning and artificial intelligence, and the growth of platforms such as the Internet of Things and fifth-generation (5G) cellular communication telecommunications networks.
Our Methodology
In order to determine which semiconductor stocks have growth potential, we took a look at the broader environment in which these firms are operating to determine which factors suit their operating models and product portfolios. Such factors include advances in semiconductor manufacturing, growing markets, and new technologies. The selected firms are then analyzed in detail by taking a look at their earnings, analyst ratings, investor letters, and hedge fund sentiment through Insider Monkey’s survey of 867 funds for Q3 2021.
Semiconductor Stocks With Growth Potential
10. Micron Technology, Inc. (NASDAQ:MU)
Number of Hedge Fund Holders: 63
Micron Technology, Inc. (NASDAQ:MU) is a semiconductor firm that designs and sells memory products. These products work alongside a computing system’s central processing units (CPUs) and graphics processing units (GPUs) to aid them in processing by storing instructions not immediately required for computing.
Deutsche Bank highlighted in a December 2021 analyst note that the company will see robust demand from sectors such as server and enterprise computing and that recent memory price drops were temporary.
63 of the 867 hedge funds polled by Insider Monkey for Q3 2021 owned Micron Technology, Inc. (NASDAQ:MU)’s shares.
Hazelton Capital Partners said the following about Micron Technology, Inc. (NASDAQ:MU) in its Q3 2021 investor letter:
“It’s hard to explain how shares of Micron Technology, Inc. (NASDAQ:MU), manufacture of DRAM and NAND semiconductor chips, can fall during a global chip shortage. In most industries, focusing on demand can give you a clear insight into what lays ahead for a company. Today, the memory and storage chip industry is no different. However, in the past, companies focused on market share led to the reckless build out of chip fabrication plants (FABs), oversupply, falling average selling prices (ASPs) of memory and storage chips, lower margins, and declining cash flows. As the industry consolidated – there are now just 3 major producers of DRAM and 5 on the NAND side – rational behavior among the key players began to take hold as competitors began focusing more on R&D. Currently, chip pricing remains cyclical although less so than in the past and that cyclicality has a long-term upward bias. The ongoing transition to newer and more robust platforms (3D 176-layer NAND & 1-Alpha node DRAM) has provided the memory and storage chip industry with improved supply capacity under its current manufacturing footprint, ultimately pressuring ASPs. Over the past three years, as most of the large platform conversions have already taken place, being able to add more bits per wafer has reached a saturation point. With no major FAB build outs planned in the near-term by competitors Samsung or SK Hynix, constrained supply and flattening cost curves should lead to durable and upward sloping ASPs once the recent volatility from the chip shortage subsides.
Currently Micron Technology, Inc. (NASDAQ:MU) trades at just 8x 2022 estimate earnings. MU is expecting growth in both DRAM and NAND not just from the supply of more chips to data centers, artificial intelligence, the auto sector, and mobile devices, but also from greater demand for gigabyte capacity per unit within those segments. With a healthy balance sheet, improving return on invested capital, and expanding cash flows, not only should Micron benefit from improving future earnings but its multiple should also reflect the transition to a flattening cost curve.”
Just like the Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM), NVIDIA Corporation (NASDAQ:NVDA), and Advanced Micro Devices, Inc. (NASDAQ:AMD), Micron Technology, Inc. (NASDAQ:MU) is a potential growth stock to watch out for.
9. Cirrus Logic, Inc. (NASDAQ:CRUS)
Number of Hedge Fund Holders: 25
Cirrus Logic, Inc. (NASDAQ:CRUS) is an American firm that provides signal processing hardware for consumer electronics products such as laptops, smartphones, tablets, wearables, entertainment systems, and headsets. This hardware is often crucial for the products’ communication needs.
Barclays increased the company’s price target to $100 from $95 in October 2021, highlighting that Cirrus Logic, Inc. (NASDAQ:CRUS)’s partnerships with Apple and Android will serve it well in the future. The firm beat analyst estimates for revue and non-GAAP EPS in its second fiscal quarter by posting $465 million and $1.82 in the metrics, respectively.
25 of the 867 hedge funds part of an Insider Monkey Q3 2021 survey had invested Cirrus Logic, Inc. (NASDAQ:CRUS).
8. United Microelectronics Corporation (NYSE:UMC)
Number of Hedge Fund Holders: 13
United Microelectronics Corporation (NYSE:UMC) is the second-largest chip manufacturer in Taiwan. It manufacturers products on mature chip processes, generally below the 16-nanometer (nm) transistor size. These technologies are facing a shortage of suppliers all over the world.
United Microelectronics (NYSE:UMC) posted $2.14 billion in revenue and $0.24 in GAAP EPS for its fiscal fourth quarter, in a strong set of results that beat analyst estimates for both.
Citi increased United Microelectronics Corporation (NYSE:UMC)’s share price target to NT$70 from an earlier NT$65 in July 2021, outlining that capacity shortage for its products ensures a smooth demand for the Taiwanese chipmaker. In Q3 2021, 13 of the 867 hedge funds part of Insider Monkey’s research owned United Microelectronics Corporation (NYSE:UMC) shares.
United Microelectronics Corporation (NYSE:UMC) brought in $2 billion in revenue and $0.26 in earnings per average diluted share (EPADS) in its Q3, beating analyst estimates for both.
7. Teradyne, Inc. (NASDAQ:TER)
Number of Hedge Fund Holders: 42
Teradyne, Inc. (NASDAQ:TER) is a company operating in the backend of the semiconductor supply chain. Its products allow chip manufacturers to test their wafers and end products for a variety of sectors such as the automotive, smartphones, and computing industries.
For its Q3, Teradyne, Inc. (NASDAQ:TER) raked in $951 million in revenue and $1.59 in non-GAAP EPS, pleasing Wall Street by beating analyst estimates for both. Following the strong earnings report, Craig Hallum increased the company’s price target to $138 from $120 in October 2021.
42 of the 867 hedge funds in Insider Monkey’s Q3 2021 survey owned Teradyne, Inc. (NASDAQ:TER) shares.
6. Analog Devices, Inc. (NASDAQ:ADI)
Number of Hedge Fund Holders: 74
Analog Devices, Inc. (NASDAQ:ADI) is a semiconductor designer that focuses on developing products for analog and digital signal processing technologies. Its products are found in cellphone infrastructure, aerospace, industrial, and other markets.
BofA raised Analog Devices, Inc. (NASDAQ:ADI)’s price target to $220 in October 2021. It explained that the company is aimed at double digit growth for its fiscal year 2022. Out of the 867 hedge funds polled by Insider Monkey during Q3 2021, 74 held a stake in Analog Devices, Inc. (NASDAQ:ADI).
In its fiscal Q4, the company pleased Wall Street by beating analyst estimates for revenue and non-GAAP EPS. It posted $2.34 billion and $1.73 in the metrics, respectively.
In its Q3 2021 investor letter, Madison Funds mentioned Analog Devices, Inc. (NASDAQ:ADI). It stated that:
“At its 2017 investor day, Analog Devices, Inc. (NASDAQ:ADI)’s VP of Automotive, Mark Gill, described how the company’s content on well-equipped electric vehicles was $600 per car compared to $250 per car for the traditional 2017 internal combustion engine car. Since then, Analog has highlighted the success of its EV battery management systems (BMS) product nearly every quarter. The BMS product is hardware and software that manages the power into and out of the battery systems. It’s the brains of the operation. Analog says it’s on its fifth generation BMS product, that it has the no. 1 market share in high voltage products, and that it is on 5 of the top 10 selling EVs. While we think that the BMS product is just 1 to 1.5% of Analog’s product mix, we think that it could add nearly a point of revenue growth per year to the company’s top-line given the expected ramp in EV production. This is a material amount of growth atop an already nicely growing company revenue line.”
Analog Devices, Inc. (NASDAQ:ADI) is a potential growth stock that needs to be on everyone’s radar, just like Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM), NVIDIA Corporation (NASDAQ:NVDA), and Advanced Micro Devices, Inc. (NASDAQ:AMD).
5. Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC)
Number of Hedge Fund Holders: 28
Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) is an industrial company that targets the semiconductor industry. It designs and sells tools to the chip companies involved in late-stage processes, such as packaging the semiconductors after they have been fabricated and cut into individual chips.
For its fourth fiscal quarter, Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) brought in $485 million in revenue and $2.17 in non-GAAP EPS, beating analyst estimates for EPS and meeting them for revenue. This highlighted improved cost efficiencies but signaled a tightening market. DA Davidson raised the company’s price target to $100 from $90 in September 2021, outlining that it expects Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC)’s revenue to beat previous CAGRs due to demand for new technologies.
28 of the 867 hedge funds held a stake in Kulicke and Soffa Industries, Inc. (NASDAQ:KLIC) during Q3 2021 according to Insider Monkey’s research.
4. ASML Holding N.V. (NASDAQ:ASML)
Number of Hedge Fund Holders: 41
ASML Holding N.V. (NASDAQ:ASML) is one of the, if not the most, important firms in the semiconductor industry. Its lithography machines, which use light to fabricate semiconductors, are used by all of the leading chip manufacturers globally since it is the only company capable of manufacturing them.
ASML Holding (NASDAQ:ASML) is one of Morgan Stanley’s top picks in the European semiconductor and tech hardware spaces for 2022 as the firm believes the company is benefitting from the chip shortage.
Morgan Stanley also thinks that ASML (ASML) could generate $34.05 billion in revenue, or 30.2 billion euros, in 2022.
In its Q2 2021 investor letter, Polen Capital mentioned ASML Holding N.V. (NASDAQ:ASML), stating that:
“Dutch technology company ASML is the world’s only supplier of photolithography systems to leading-edge semiconductor manufacturers. It is a gross simplification and a valid point to note that ASML’s technology enables the computing technology we use today. For years, ASML engineers bent the laws of physics and enabled Moore’s Law—which states that computer chips will become faster and cost less—to progress.
Incremental innovation gains mushroomed with the rollout of Extreme Ultraviolet (EUV) technology. We were impressed by management’s recent acknowledgment that demand for ASML’s lithography systems is exceeding their prior expectations. Recent announcements by management and major customers for ASML give us even more confidence in the sustainability of growth. We believe ASML could grow its earnings at a high-teens rate over the coming five years.”
3. NVIDIA Corporation (NASDAQ:NVDA)
Number of Hedge Fund Holders: 83
NVIDIA Corporation (NASDAQ:NVDA) is the world’s leading graphics processing unit (GPU) designer and seller. The company’s products are used to run the latest video games, power-gaming consoles, crunch numbers for data centers, and more.
Citi kept a $500 price target for the company’s shares in November 2021. 83 of the 867 hedge funds part of Insider Monkey’s Q3 2021 survey had owned NVIDIA Corporation (NASDAQ:NVDA)’s shares.
Vulcan Value Partners, mentioned NVIDIA Corporation (NASDAQ:NVDA) in its Q1 2021 investor letter. Here is what the fund said:
“NVIDIA Corp. is the dominant supplier of Graphics Processing Units (GPUs) worldwide. NVIDIA’s GPUs are at the intersection of a number of important computing trends including the movement to the Cloud, artificial intelligence, autonomous vehicles, edge computing, gaming, and more. We previously owned NVIDIA and sold it in the third quarter of 2020 as the price to value gap closed and our margin of safety was reduced. As with all our MVP companies, we continued to follow NVIDIA closely. Since that time, NVIDIA reported excellent results and its value has compounded rapidly. The technology selloff at the beginning of the year negatively affected the stock price while our estimate of NVIDIA’s value per share increased. This happy combination of events created a margin of safety and an opportunity to once again add NVIDIA to the portfolio.”
2. Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM)
Number of Hedge Fund Holders: 67
The Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) is the world’s leading contract chip manufacturer. It manufacturers semiconductors using designs provided to it by its customers, and has some of the largest consumer electronics firms’ on its list.
For its Q4, Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) reported $15.7 billion in revenue and $1.15 in GAAP EPS, beating analyst estimates for EPS only. It also kicked off pilot production of its leading-edge 3-nanometer (nm) manufacturing process in December, sticking to the plan revealed by CEO Dr. C.C. Wei at the Q3 earnings call.
Cowen set a $120 price target for the company in October 2021, stating that while the demand for its products is strong, it might peak soon. An Insider Monkey poll of 867 hedge funds in Q3 2021 revealed that 67 held a stake in Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM).
L1 Capital mentioned the chipmaker in its 3Q21 investor letter, which outlined that:
“Even though they are not majority State owned and we would expect many of China’s technology champions to continue to grow strongly, outcomes for shareholders may be unsatisfactory… The Fund has retained its investment in Taiwan Semiconductor Manufacturing Company (TSMC) which is well placed to maintain its global leadership in semiconductor manufacturing. Due to geopolitical risks, we limit the position size of TSMC in the Fund.”
1. Advanced Micro Devices, Inc. (NASDAQ:AMD)
Number of Hedge Fund Holders: 65
Advanced Micro Devices, Inc. (NASDAQ:AMD) is an American semiconductor designer that sells central processing units (CPUs), graphics processing units (GPUs) and custom designed chip products. It has delivered strong growth over the past two years.
Wedbush raised its price target to $165 from $140 in November 2021, outlining that as long as Advanced Micro Devices, Inc. (NASDAQ:AMD) executes, its future is a strong growth story.
According to Insider Monkey’s research, 65 of 867 hedge funds in Q3 2021 held Advanced Micro Devices, Inc. (NASDAQ:AMD)’s shares.
Artisan Partners Limited Partnership mentioned Advanced Micro Devices, Inc. (NASDAQ:AMD) in its Q4 2020 investor letter outlining that:
“We also exited our positions in Advanced Micro Devices. Our investment campaign in Advanced Micro Devices (AMD) began in the second half of 2018, and we have seen a new management team reinvigorate the company’s product portfolio of microprocessors for PCs and servers, graphics processors, and video game consoles. These new, higher-margin products have helped the company partially close its margin gap with peers and capture share from market leader Intel. While we believe there is meaningful runway for further share gains and margin expansion, AMD has appreciated far beyond our mid-cap market cap mandate, and we exited our position.”
You can also take a peek at the 10 Best Performing Semiconductor Stocks of 2021 and 10 Healthcare Stocks to Buy According to John Rogers’ Ariel Investments.
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Disclosure. None. 10 Semiconductor Stocks With Growth Potential is originally published on Insider Monkey.
