The chip industry has been growing for decades, and investments in artificial intelligence (AI) technology can keep the industry growing for years to come.
While the semiconductor industry may experience cyclical demand, the increasing number of chips used in consumer devices, cars and data centers bodes well for the sector’s long-term prospects. Statista predicts the industry will grow 10% annually through 2029 to $980 billion.
To take advantage of this opportunity, here are two excellent chip companies to keep for the next decade.
1. Semiconductor manufacturing in Taiwan
Taiwanese semiconductor manufacturing (NYSE: TSM) is about to join the $1 trillion club. The stock price has doubled since 2022, bringing the market capitalization to approximately $971 billion. TSMC is in a lucrative position as the leading semiconductor foundry, which points to its business in making chips for other companies, including Nvidia, Broadcom, Advanced micro devicesAnd Intelamong others.
The company has been delivering competitive returns for years and continues to demonstrate strong growth. Analysts expect sales to rise 26% this year before rising 24% in 2025, according to YCharts.
By investing in Taiwan Semiconductor you are betting on the long-term progress in chip technology and the increasing chip numbers in smartphones, data centers and cars. Because the chips are used in different end markets, TSMC is a relatively safe way to invest in the growth of the chip industry.
TSMC is well-positioned to capitalize on growing demand for chips used for AI workloads. The company’s revenue from high-end chips makes up half of its sales, and TSMC controls 61% of the global foundry market. The company’s long-standing customer relationships, advanced manufacturing processes and large capacity to meet demand are advantages that position the company to deliver profitable growth for shareholders.
The stock also offers excellent short-term return prospects as it trades at a very attractive price-to-earnings ratio compared to forward earnings estimates. Analysts expect the company’s profits to grow 26% year over year. Assuming TSMC meets these estimates, the stock could double within three years if it continues to trade at the same price-to-earnings ratio.
2. Gun ownership
Arm positions (NASDAQ:ARM) potentially has an even greater long-term advantage than TSMC. It currently has a market cap of about $159 billion, but could one day join the $1 trillion club. It is gaining market share in several markets where its chips are used, including cloud computing, networking equipment, consumer electronics, automotive and the Internet of Things.
Arm’s revenue grew 39% year-over-year last quarter, but it’s important to note that Arm doesn’t make money from chip production. Instead, Arm focuses on chip design and then licenses those designs to other semiconductor companies and manufacturers. It earns a royalty on almost all processors shipped with its products, allowing Arm to earn very high margins.
Arm-based processors are in high demand because they deliver exceptional performance with lower power consumption. The latter is becoming increasingly important as more powerful chips become hotter and drive up energy costs. For large data centers this can be a problem, but Arm offers solutions that address this challenge. For example, the British Avantek has developed an Arm-based server that uses up to 90% less electricity.
Weapons-based products play such an important role in the industry that Nvidia tried to acquire it four years ago, ultimately failing to gain regulatory approval. But Nvidia’s Grace processor, included in the upcoming Blackwell platform for AI workloads, is based on Arm. This positions the chip designer to take advantage of the growing demand for AI chips in data centers.
Arm stocks have been volatile, but patient investors should do well. Analysts expect the company’s profits to grow 27% annually in the coming years. The company should continue to grow faster than the chip industry and deliver excellent returns for investors over the next decade.
Should You Invest $1,000 in Semiconductor Manufacturing in Taiwan Now?
Consider the following before buying shares in Taiwan Semiconductor Manufacturing:
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John Ballard has positions in Advanced Micro Devices and Nvidia. The Motley Fool holds positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
2 Surefire Chip Stocks to Buy and Hold for the Next Decade was originally published by The Motley Fool
