It’s hard to imagine a more bullish scenario for semiconductor stocks than the current global chip shortage.
With the COVID-19 pandemic driving demand thanks to people stuck at home using their favorite technological devices and a China-U.S. trade war that resulted in several supply chain bottlenecks, the companies that produce these innovative integrated circuits are truly thriving.
Look no further than Nvidia (NVDA) - Get NVIDIA Corporation Report, a monster semiconductor stock that has rallied more than 55% year to date amid the chip shortage backdrop and a stock split announcement.
While several analysts have boldly placed a $1,000 price target on Nvidia that implies even more upside, there are plenty of other options in the industry that might present a better risk-to-reward profile at this time.
The truth is that the semi shortage impacts so many different industries that it could take years for supply to catch up to demand. That means there will likely be plenty of long-term winners to come out of the current circumstances.
While Nvidia is undoubtedly a true market leader and worthy of a spot in any long-term portfolio, investors should probably be on the lookout for additional semiconductor stocks to buy at this time given the industry’s long-term growth prospects.
Here are some of the strongest semiconductor stocks to buy that aren’t Nvidia:
Fabless semi companies like Marvell Technology (MRVL) - Get Marvell Technology Group Ltd. Report are intriguing because they outsource the majority of their semiconductor fabrication to third-party foundries like Taiwan Semiconductor Manufacturing (TSM) - Get Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR Report.
This frees up tons of capital since owning and maintaining a semiconductor fab, also known as a foundry, requires significant spending. All of the capital saved on manufacturing can in turn be used to invest in developing and selling innovative new products.
Marvell Technology has been one of the strongest chip stocks over the last year and the company continues to exceed earnings expectations even with short-term supply-chain constraints.
The company’s cutting-edge chips play a key role in some of the hottest end markets, including enterprise, cloud, automotive, industrial, and consumer markets.
With secular trends like the rise of 5G and companies moving their enterprise operations into the cloud, Marvell is poised to become a semiconductor powerhouse over the next decade.
It’s also worth mentioning that the formerly Bermuda-based company has reorganized to be domiciled in the United States, which opens up the possibility for massive U.S. government contracts going forward.
Semiconductors are considerably complex and intricately designed materials that require very specific equipment to produce.
That’s a big reason to consider adding shares of Netherlands-based ASML Holding (ASML) - Get ASML Holding NV ADR Report since it’s one of the world’s largest suppliers of semiconductor manufacturing equipment.
ASML specializes in photolithography systems, which essentially project light through a blueprint of a pattern that is printed onto silicon wafers.
These systems are used by all of the biggest semiconductor manufacturers out there and could even lead to the next level of Moore’s law, which tells us that ASML is at the forefront of semiconductor innovation.
Moore’s law states that the number of components found in integrated circuits (semiconductors) doubles every year each decade.
The effects of this doubling lead to more powerful computing at lower costs, which has huge implications for the future of semiconductor technology.
The bottom line is that although ASML is a pricy stock by traditional valuation metrics, paying a premium for quality and ingenuity can end up being a very lucrative decision.
This is one of the best semi stocks to own if you are bullish on the 5G revolution, as Broadcom (AVGO) - Get Broadcom Inc. Report supplies chips to two of the biggest smartphone vendors in the world, Apple (AAPL) - Get Apple Inc. (AAPL) Report and Samsung.
It’s also trading at a discount relative to peers like Texas Instruments (TXN) - Get Texas Instruments Incorporated Report and Nvidia with a forward P/E ratio of 17.45 that points to higher earnings ahead.
Apple agreed to buy $15 billion worth of wireless components from Broadcom over a three-and-a-half-year period back in 2020, which tells us that the company has a fantastic opportunity to benefit from growing iPhone sales in emerging markets.
Broadcom is also intriguing for investors interested in capitalizing on growth in the infrastructure software space, as products like mainframe and enterprise software deliver strong margins and will be in high demand as many companies continue with their digital transformations.
Broadcom's talks to buy analytics, business intelligence, and data-management software provider SAS Institute for somewhere in the range of $15 billion to $20 billion reportedly have ended. The deal would have been another strong move to improve its enterprise software offerings.
Finally, investors should be attracted by Broadcom’s ability to support a strong dividend payout and future acquisitions given the company’s reliable recurring revenue from multi-year contracts.
The stock currently offers a 3% dividend yield, which is the highest payout among its large-cap semiconductor peers.