The semiconductor industry has produced several growth stocks over the past 40 years that have generated enormous fortunes for shareholders. It’s a $600 billion industry that will continue to grow over the next decade, but investors need to choose wisely. The advent of artificial intelligence (AI) is giving some companies advantages while exposing weaknesses in others.
Here are two chip stocks to buy now and one industry heavyweight to avoid.
Semiconductor manufacturing in Taiwan
Semiconductor manufacturing in Taiwan (NYSE:TSM)or TSMC for short, is one of the world’s leading chip manufacturers. The company operates as a foundry, meaning it produces chips for other companies, including NVIDIA And Advanced micro devices (NASDAQ:AMD).
Its expertise in cutting-edge processing nodes leads to a lucrative business with a high operating profit margin of 42%, more than double the 17% S&P500 Average.
TSMC stock has risen more than 82% in the last year. The company’s second-quarter revenue in US dollars rose 33% year over year. Management expects strong demand in the third quarter, driven by smartphones (it is a major supplier to Apple) and AI-related chips.
The company is well positioned for further growth as companies begin to introduce more AI features into mobile devices. Seasonal weakness in smartphone sales contributed to TSMC’s weakest market in the second quarter, so an improvement in demand would reinforce the momentum the company is experiencing in high-performance computing. In that regard, the launch of Apple Intelligence along with the iPhone 16 this fall will be a key catalyst.
TSMC has experienced strong annual revenue and profit growth for many years. A $10,000 investment 10 years ago would be worth more than $100,000 today with reinvested dividends.
It’s still a good buy considering the stock’s price-to-earnings (P/E) ratio of 25 looks very attractive compared to Wall Street’s long-term earnings growth estimates of 26% per year. If those estimates hold true, the stock could double in value within three years, assuming it still trades at the same P/E ratio, which is likely since it’s close to the S&P 500 average.
Advanced micro devices
The second chip stock to buy right now is one of TSMC’s most important customers, Advanced Micro Devices. Of course, strong growth at TSMC reflects increasing demand for semiconductors among its large customer base, and that’s good news for AMD shareholders.
After a recent decline, shares are up 26% over the past year. AMD is seeing accelerating growth in its data center segment, which is a key catalyst for the stock. Revenue in this segment doubled from the year-ago quarter, reaching $2.8 billion, or nearly half of the company’s total revenue.
AMD also saw tremendous improvements in its customer segment, including chip sales for consumer PCs. Strong demand for Ryzen processors contributed to a 49% year-over-year increase in customer revenue last quarter.
This momentum shows that AMD is well positioned for growth in the AI era. Management expects data center graphics processing units (GPUs) to generate full-year revenue of $4.5 billion, which has already increased over the past two quarters. AMD’s Ryzen chips are also expected to be in strong demand as AI-powered PCs hit the market next year.
The stock currently has a P/E ratio of 40, which seems reasonable given Wall Street’s long-term earnings growth forecast of 43% per year. Assuming AMD meets those expectations, the stock should be a very worthwhile investment.
Why investors should avoid Intel
Intel (NASDAQ:INTC) Shares have underperformed in recent years as the company loses market share to AMD. The stock fell to a multi-year low after the company reported weak second-quarter results, which included an announcement to suspend its dividend after the company reported a string of losses last year.
Revenue declined 1% year-over-year in the second quarter. The client computing business increased 9%, while the data center and AI business declined 3% year-over-year.
These numbers are alarming given the strong growth of TSMC, which is the benchmark for industry demand. Intel is losing its innovation edge at a time when other companies are seeing explosive demand from the AI arms race.
Intel, to its credit, has implemented a plan to regain industry leadership. The company recently began production of its next-generation AI chip, Lunar Lake, which addresses the need for more powerful chips for MicrosoftThe new Copilot+ PCs from .
But the AI server market is a key battleground in the chip industry, and AMD is on track to overtake Intel in data center revenue in the third quarter. Intel appears to have put itself in a slump by investing in expanding its foundry business, which generates a third of the company’s revenue, while AMD continues to focus its investments on building its long-term roadmap for high-performance processing technologies.
Intel’s collapse highlights the importance of investing in companies whose products are experiencing growing demand, so investors should avoid the stock right now and stick to the companies experiencing the strongest growth, such as Taiwan Semiconductor and Advanced Micro Devices.
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John Ballard holds positions in Advanced Micro Devices and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Apple, Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short 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.
