It’s perfectly reasonable to suddenly become interested in semiconductor stocks if you follow business news. Finally, semiconductor darling Nvidia (NASDAQ: NVDA) is recently up 226% over the past year and has averaged a gain of 75% per year over the past decade. Who wouldn’t dream of enjoying such outrageous returns?
Well, you could still invest in Nvidia, and many see a great future for the company, but the shares have arguably led the way to some extent and don’t appear to be bargains. (Of course, if you’re buying for the long term, you can still do well with Nvidia.)
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Instead, consider some semiconductor stocks whose shares appear more attractively valued at recent levels. Here are three – plus a powerful exchange-traded fund (ETF).
|
Stock |
5 years Avg. Annual return |
10 years Avg. Annual return |
|---|---|---|
|
ASML (NASDAQ: ASML) |
21.74% |
21.65% |
|
Taiwanese semiconductor manufacturing (NYSE: TSM) |
31.10% |
25.04% |
|
Broadcom (NASDAQ:AVGO) |
43.48% |
35.55% |
|
VanEck Semiconductor ETF (NASDAQ: SMH) |
31.71% |
26.60% |
Source: Morningstar.com, as of November 1, 2024.
It’s worth noting that you don’t necessarily need growth stocks to become a millionaire. Even a simple S&P 500 index fund can get you there. The S&P 500 has averaged annual gains of roughly 10% over long periods of time, and that’s a strong growth rate over many years, as the table below shows.
But you can certainly aim for a faster growth rate, and semiconductor stocks could deliver that. If you have an average annual growth of 15% with them, you can see how your money can grow over time in the table below:
|
$10,000 invested per year and growing |
Growing by 10% |
Growing by 15% |
|---|---|---|
|
10 years |
$175,312 |
$233,493 |
|
15 years |
$349,497 |
$547,174 |
|
20 years |
$630,025 |
$1,178,101 |
|
25 years |
$1,081,818 |
$2,447,120 |
|
30 years |
$1,809,434 |
$4,999,569 |
|
35 years |
$2,981,268 |
$10,133,457 |
|
40 years |
$4,868,518 |
$20,459,539 |
Source: Calculations by author.
Now let’s meet some promising semiconductor stocks.
ASML specializes in making the lithography equipment required for the production of semiconductors and is among the top in its field. (The equipment etches complex circuits on silicon wafers, and it is the only supplier of advanced extreme ultraviolet systems (EUVs). The equipment is expensive and long-lasting, so that generates a lot of recurring maintenance revenue.
In the company’s third quarter, sales grew slower than expected, by just 20%, and that, along with some other disappointing numbers, sent the shares down – to an attractive level. While the coming year may not see robust growth, ASML appears to be a winner in the long term. The stock recently had a forward-looking price-to-earnings (P/E) ratio of 28, below its five-year average of 35. It also pays a dividend, which recently yielded 1%.
You may not realize it, but many semiconductor companies simply design chips and then have others manufacture them. Relatively few companies actually make chips, and of those, Taiwan Semiconductor (TSMC) is the largest in the world, with a market share of more than 60%.
Recently valued at nearly $1 trillion, its growth prospects are good, partly because of its size and economies of scale. A particularly promising growth driver for TSMC and other chip specialists is the proliferation and growth of artificial intelligence (AI) technologies, which increasingly require semiconductors. Another attractive aspect of TSMC is that it has become large and stable enough to pay a dividend, which recently yielded 1.3%. That may not seem like much, but TSMC’s payout has nearly doubled over the past five years.
One caveat is that the company is based in Taiwan and thus vulnerable to interference from China. That’s tempered by a recently opened TSMC manufacturing plant in Arizona, which is even outperforming factories in Taiwan.
Broadcom specializes not only in semiconductor chips, but also in software, and its businesses are highly diversified, including wireless and wireline technology, optical products, mainframe software, cybersecurity and storage, and many others. The offering is needed for AI operations, among other things, and business has been good lately, with revenue up 47% year over year in the third quarter.
Broadcom is another dividend payer, with a recent yield of 1.2% and a payout that has also roughly doubled over the past five years. With a recent price-to-earnings ratio of 20, slightly above the five-year average of 14, the stock is not a bargain. It can still perform well for long-term investors – or if you want to play it safer, you can just add it to your watchlist or buy into it incrementally over time.
Here’s one final investment to consider: the VanEck Semiconductor ETF. (ETFs are funds that trade like stocks.) If you can’t decide which semiconductor stocks to buy, this exchange-traded fund (ETF) lets you immediately invest in about 25 of them, including all three above — plus Nvidia, its largest holding . The expense ratio (annual fee) is a reasonable 0.35%. And it happens to be the best-performing ETF of the past decade.
Take a closer look at any of these portfolio candidates that interest you.
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Selena Maranjian has positions in ASML, Broadcom, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool holds positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
3 Semiconductor Stocks (and 1 ETF) That Could Make You a Millionaire was originally published by The Motley Fool
