Market Insights

Few industries are more essential to the modern economy than semiconductors. This article will review key companies in the group, which has pulled back significantly during this year’s selloff in technology.

From their earliest use in computers and the space program, semiconductors have spread to countless devices and applications. They are used in everything from smart phones and data centers to cars, appliances and videogame consothe itles. Coronavirus caused shortages in many of these end markets, which some analysts think will boost demand as users rebuild inventories.

Nvidia and Advanced Micro

Nvidia (NVDA) and Advanced Micro Devices (AMD) are the most actively traded chip stocks. They’ve moved to the top of the industry in recent years by focusing on data-center servers. NVDA is also the most valuable U.S. semiconductor company, with a market capitalization of more than $400 billion.

NVDA trades at higher multiples because of its exposure to newer technology. (Its price/earnings ratio is around 50 times. That ranks third in the industry, according TradeStation data.) The higher multiple also caused the stock to fall more sharply as the technology sector declined since late 2021.

Last quarter was a milestone for NVDA because data-center products passed videogame chips for the first time.

NVDA reported 83 percent growth in its data center chips last quarter, but CEO Jen-Hsun Huang warned the graphics chips used in gaming will decline in the current quarter. The shares initially dropped, and then rebounded sharply as investors bought the pullback.

AMD had an even stronger report, with earnings, revenue and guidance cruising past Wall Street’s estimates. The company has more exposure to traditional PCs, although this has been a positive because it’s taken market share from former leader Intel (INTC). Its cloud-server segment grew by 88 percent last quarter.

AMD could also be in focus during its analyst day tomorrow. Margins in particular could be a big driver, according to BofA analyst Vivek Arya, who thinks investors are underappreciating its profitability. Arya rates the stock “buy,” projecting it will rally more than 50 percent to $160 in the next year.

Qualcomm and Intel

Qualcomm (QCOM) and Intel (INTC) are two of the older names in the chip space, although their businesses have gone in opposite directions lately.

QCOM has diversified as it loses business for the Apple (AAPL) iPhone, shifting shift toward Samsung handsets, Internet of Things (IoT) and auto-related products. The company has beaten estimates across the board the last three quarters. It jumped to record highs in late 2021, and has retraced almost all that move this year. QCOM also trades for about 18 times earnings, while the broader chip space is valued at around 28 times, according to data from TradeStation and VettaFi.

INTC, on the other hand, cut guidance last quarter. It also continued to struggle in the PC market as laptop makers switch to AMD’s higher-performing chips. The Dow Jones Industrial Average member is also growing at a fraction of AMD’s speed in the data center market (22 percent versus 88 percent).

The big challenge for INTC is developing and manufacturing new products. Investors have been disappointed with the achievements of CEO Pat Gelsinger since his installation in January 2021. In future quarters, Wall Street will likely watch for signs of a successful turnaround. As a result, it trades for just 8 times earnings.

Industrial Chip Stocks

If NVDA and AMD represent the cutting edge of technology, another group of chipmakers focuses on older markets like automotive and industrial. These less-flashy names also trade at lower valuations, helping them outperform during the recent pullback.

ON Semiconductor (ON), for example, is the top-performing chip stock this year. (It’s down 3.6 percent versus a 13 percent drop for the S&P 500.) ON’s products help manage power for vehicles and industrial systems. The shares broke out to new highs in November and have held above those levels in 2022. That’s a rarity given weakness in the broader technology space. The company, whose earnings have beaten estimates the last three quarters, was also in the news this week after being added to the S&P 500 index.

Analog Devices (ADI) makes chips for applications like clocks, radio transmitters and amplifiers. Earnings, revenue and guidance surprised to the upside on May 18 thanks to strong demand. It’s also benefiting from synergies as management integrates last year’s Maxim acquisition.

Texas Instruments (TXN) is another provider of industrial and automotive chips. It’s drifted in a range for more than a year.

Broadcom and Marvell

Broadcom (AVGO) and Marvell Technology (MRVL) are two other noteworthy semiconductor firms. However both have been less active recently.

AVGO mostly focuses on communications products like cable boxes, fiber optics and data-center networks. It’s currently attempting to purchase VMware (VMW), which provides virtualization software for cloud computing. Because the takeover faces potential antitrust challenges, investors may focus on regulatory developments instead of company fundamentals.

MVRL was a big mover in 2021 as the market focused on its 5G-networking products. It’s drifted this year but attempted to rally following its last quarterly report on May 26.

Semiconductor Suppliers

Other companies supply the semiconductor industry with equipment and software:

• Applied Materials (AMAT) is the largest supplier of chip-manufacturing equipment. It has struggled with weak guidance and U.S. restrictions on business with China.
• Cadence Design Systems (CDNS) provides software for designing and verifying chips. The company beat estimates and guided above consensus the last two quarters.
• Lam Research (LRCX) and KLA (KLAC) make tools and equipment for chip companies. They trade similarly to AMAT.

Aside from the U.S. companies noted above, there are two major global names:

• Taiwan Semiconductor (TSM): The world’s biggest chipmaker by market cap. It’s a contract manufacturer of chips for companies like AMD and NVDA.
• ASML (ASML) is a Dutch supplier of chip-manufacturing equipment. Despite its hefty market cap of $234 billion, it’s not an actively traded stock.