6 Best Semiconductor Stocks To Buy March 2023

Semiconductors are a vital part of virtually all industries. Here’s how to get exposure to them.

“Like sands through the hourglass, so are the days of our lives,” says the familiar opening of NBC’s Days Of Our Lives. In the decade prior to the premiere of the popular soap opera in 1965, Jack Kilby of Texas InstrumentsTXN
and IntelINTC
founder Robert Noyce, then of Fairchild Semiconductor, gave birth to integrated circuits and monolithic chips made of silicon. More than six decades later, the devices are everywhere, and rather than sand through an hourglass, life in the 21st century seems to be a series of encounters with an endless number of semiconductors.

It is next to impossible to conceive of any industry or part of daily activity that doesn’t brush up against chips in one form or another. Computers, yes, but also all electronic communications, manufacturing, design, media, agriculture, government, business, transportation—you name it, semiconductors have been there, done that, and walked away with the t-shirt.

According to Deloitte, as of 2020, the average passenger vehicle included $475 in chips, while a cellphone had $340. Not only are they in everything, but are big everywhere, effectively providing diversity through exposure to economic and geographic sectors.

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

Berkshire Hathaway’sBRK.B
Charlie Munger recently remarked that it is “a very peculiar industry” so driven by change that “you have to take all the money you’ve made and with each new generation of chips you throw in all the money you previously made.”

There are a relatively small number of companies that design and manufacture their own chips, as well as those who manufacture but don’t design (foundry companies, called fabs, short for fabrication) and ones that design but don’t manufacture (fabless). The giants like Intel and Texas Instruments have been around for decades and there are always up-and-comers.

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

Taiwan Semiconductor Manufacturing Company Limited (TSM)

It’s almost impossible to discuss semiconductors without a mention of Taiwan Semiconductor Manufacturing Company, often called TSMC. Since its start in the late 1980s, TSMC has become 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,” says August. “TSMC is one of the largest semiconductor foundries in the world and has partnerships with several leading technology companies.”

Since its opening as a public company through its fiscal year 2022—31 years—TSMC has seen 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 $27.2 billion is offset by cash and cash equivalents of $50.8 billion.

TSMC has continued to make the investments to provide the newest semiconductor manufacturing possible for its customers, which include such tech luminaries as AppleAAPL
, AMD, QualcommQCOM
, NVIDIADIA
and Sony.

Lattice Semiconductor
LSCC
(LSCC)

“One of our top semiconductor picks is Lattice Semiconductor, a company that specializes in designing and manufacturing low-power, field-programmable gate arrays,” says Sam Boughedda, an equities trader at AskTraders.com. Field-programmable gate arrays, or FBGAs, are semiconductors that companies can customize to their own needs. That includes MicrosoftMSFT
, which tailors FPGAs in data centers that run its Bing search engine to speed performance and in parts of its Azure cloud computing platform. But the technology has the flexibility and power to serve many other types of functions.

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

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

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AEHR Test Systems (AEHR)

Semiconductor manufacturing doesn’t exist without expensive and esoteric tools and that is the market AEHR is in: testing of silicon carbide semiconductor wafers. Silicon carbide is a specialty semiconductor material widely used in power electronics. The technology is a particularly good match for electric vehicles because it can manage higher levels of power than similar-sized silicon packages.

“AEHR has a couple of the four largest [semiconductor companies] as customers; with more in the wings,” says Gene Inger of the Inger Letter. “Note that both Goldman Sachs and Fidelity recently established significant positions in AEHR.” Also, as Inger notes, there is no long-term debt, giving the company flexibility. Share prices are at near all-time highs and he thinks the firm is “under-followed.”

SkyWater Technologies (SKYT)

Another Inger recommendation, SkyWater is a spinoff from Cypress Semiconductors. The company has a number of interesting features, like, as Inger notes, “serious contracts for ‘rad-hard,’ or radiation hardened, chips for NASA and several military contractors.” The company also has a fab plant in Minnesota and has taken over operation of one in Florida in a public-private partnership with Osceola County in the state. The positioning of the company is as a DMEA-accredited Trusted Foundry company. The accreditation gives SkyWater a leg up in defense department work. Recent directives out of the Biden White House that focus on government projects using U.S. manufacturing should also provide additional advantages. As Inger notes, “They are 100% domestic and a participant benefiting going forward from the Chips Act.” SkyWater also provides unusual and custom products for automotive, industrial and medical applications.

Last fiscal year became a turning point for the company, as revenue in the fourth quarter jumped 69% over the previous year, and while there was a loss of 3 cents per share, that was an upside surprise to the 11 cent loss that analysts expected. There is obviously risk in a company that isn’t profitable, but enterprise value at the end of 2022 was 2.4 times total revenue, which is a low multiple and the median analyst target price of $18 is still above current prices in early 2023. If management can attain the growth it projects, this could be a sleeper, or possibly an acquisition target at some point.

Nvidia (NVDA)

Nvidia started as a semiconductor company producing graphics processing units (GPUs). But the supposedly specialized hardware really means chips that can do complex numerical calculations with blazing rapidity. That opens up a world of other uses. Sean August mentions gaming, automotive and data centers are three industries in which the company plays. Others include complex design and visual rendering, virtual worlds and high-performance computing. Another important area for Nvidia is artificial intelligence, including such uses as uniquely identifying users and machines in a network to detect cyberthreats and building automated services like audio transcription or virtual assistants.

Except for 2020, revenue and net income growth in recent years have been largely strong. With a current ratio running 4 to 8 times over the last few years, return on capital of 13.6% to 22.9%, return on equity 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 get exposure to a particular industry or segment while maintaining sector diversity that you’re unlikely to reproduce with individual investments. August suggests the iShares PHLX ETF, “which includes companies that design, manufacture and distribute semiconductors,” he says. “The ETF has exposure to a broad range of semiconductor companies, including those that focus on AI, graphics and mobile devices.”

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