The artificial intelligence (AI) arms race is creating a favorable demand environment for leading semiconductor companies. The PHLX semiconductor sector The index is up 122% since its 2022 low, easily outpacing the return of 69% of tech-focused stocks. Nasdaq Composite.
While the chip industry experiences occasional sales declines, the sector has seen a steady upward trend since the 1980s. The growing demand for high-quality chips to support the build-out of AI servers should ensure many years of strong growth for the leading suppliers.
Here are two top semiconductor stocks with superior return potential over the next decade.
1. Gun ownership
Arm positions (NASDAQ:ARM) perhaps not as familiar as to some Intel, but it is one of the leaders of the semiconductor industry. It licenses designs for central processing units (CPUs) used in Arm-based Windows PCs, smartphones, supercomputers and cloud servers.
Because it generates revenue from licensing and royalties, it is a highly profitable business that can deliver superior shareholder returns.
Arm is currently seeing strong adoption for its Armv9 technology due to its better performance and energy efficiency. The company’s expertise in designing cheap and efficient chip technology will benefit power-hungry data centers.
Royalty revenue rose 37% year-over-year last quarter, indicating an increase in market share in the cloud computing market. All leading cloud providers, including Alphabet‘s Google, AmazonAnd Microsoft, use Arm-based chips. Its integration with Nvidia‘s Grace CPU positions Arm as a leading provider of AI applications in data centers.
Another growth opportunity is PCs with AI. Arm-based chips are the standard used in 99% of the world’s smartphones, and could see similar gains as the PC market moves away from Intel’s traditional x86 processors to Arm-based chips.
The biggest risk for Arm investors is the stock’s high valuation, which looks expensive at a price-to-earnings ratio of 100 based on this year’s consensus forecast. It’s still worth pulling the trigger, because Arm is becoming the gold standard for CPU technology in all major computer markets.
The lucrative business model, based on licensing and royalty revenues, should support robust earnings growth and shareholder returns over the long term.
2. Micron technology
Micron technology (NASDAQ:MU) is one of the leading suppliers of dynamic random access memory (DRAM) and non-volatile memory (NAND) used in various products, but mainly in PCs and data centers. The stock has soared to new heights this year as high-performance memory modules begin to see exploding demand from AI servers.
The memory and storage markets are notorious for cyclical fluctuations in demand and prices. Last year, falling memory prices were the main factor causing the semiconductor industry to report an 8% decline in sales.
But AI is pulling Micron’s business out of the slump, helping the company’s revenue grow 58% year over year in the most recent quarter, and management expects more growth.
Most importantly, Micron’s profits benefit from the shortage of high-quality memory chips. In the second fiscal quarter, the company reversed last year’s earnings per share loss to a profit of $0.71. Strong demand from the data center market should support favorable price developments and thus drive the company’s earnings growth.
The risk is that a sharp increase in data center infrastructure spending could lead to an oversupply of chips for the data center market and put pressure on memory sales prices. However, Micron has another card up its sleeve to fuel growth, namely a recovery in the consumer PC market. The company is performing well to start the year, but is not yet firing on all cylinders.
The cyclical nature of the business is the main risk to watch out for, but the current consensus estimate sees earnings per share at $1.02 this fiscal, before rising to over $9 next year. Demand for AI could lead to new all-time highs in sales and profits, sending Micron’s stock price soaring in the coming years.
Should You Invest $1,000 in Arm Holdings Now?
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Ballard has positions at Nvidia. The Motley Fool holds positions in and recommends Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 calls of $45 on Intel, long January 2026 calls of $395 on Microsoft, short August 2024 calls of $35 on Intel, and short calls in January 2026 from $405 on Microsoft. The Motley Fool has a disclosure policy.
2 Semiconductor Stocks to Buy and Hold for Big Long-Term Potential was originally published by The Motley Fool
