Recently, semiconductor stocks surged dramatically. Outstanding earnings and promising forecasts from Nvidia (NASDAQ:NVDA) sparked this rally, leading to a stellar week for the sector. The VanEck Semiconductor ETF (NYSEARCA:SMH), a key industry indicator, jumped over 11% in a single week.
Looking closer, three standout semiconductor stocks emerge for future investment. These stocks have shown incredible growth historically, and they’re poised for more. Strong business models equip them to capitalize on the booming chip stock market throughout the 2020s and beyond.
Now, let’s shine a light on these promising stocks. They have proven their worth in the past, and their sturdy business strategies suggest a readiness to leverage the escalating chip industry demand. It’s time to examine these powerhouses closely. Each one is a strong contender for the top semiconductor stock of the future.
Taiwan Semiconductor Manufacturing (TSM)
Taiwan Semiconductor Manufacturing (NYSE:TSM) is the dominant semiconductor foundry company worldwide. And its leadership continues to grow. TSM’s market share has risen from just under 50% a few years ago to 58% at the end of 2022. The next closest competitor, Samsung Electronics, has just 16% market share.
So, what does this imply in real-world terms? Essentially, TSM stands as the giant in chip manufacturing. Given that not all semiconductor companies own their manufacturing facilities, they resort to outsourcing their production requirements to a foundry. Here’s where TSM steps in. Commanding the majority of this business, TSM captures the lion’s share of revenues and profits from the physical production of semiconductor chips.
Fundamentally, TSM operates with platform neutrality. Essentially, the dominant semiconductor brand in the chip market doesn’t notably affect TSM’s operations. Regardless of the victor, TSM remains consistently involved, assembling chips for all players.
Acting as the quintessential ‘picks and shovels’ player in the semiconductor industry, TSM is strategically positioned. With the industry booming, TSM is set to reap the benefits. Thus, irrespective of which way the market sways, TSM stands on solid ground, ready to capitalize on industry growth.
Monolithic Power Systems (MPWR)
Monolithic Power Systems (NASDAQ:MPWR) is one of the most fascinating companies in the semiconductor industry. It began by making low-end chips for a variety of consumer electronics applications. Over the years, it has shrewdly reinvested its profits to broaden its product lines and move into higher end categories of the chip industry.
Primarily, the company’s unwavering emphasis on R&D and organic product development has reaped considerable benefits. In effect, this approach has yielded unique products that have found utility across a broad spectrum of markets. Consequently, the firm enjoys a diversified market presence, thanks to its product differentiation strategy. MPWR stock has delivered shareholders jaw-dropping returns, rising from $10 in 2004 to more than $500 today.
A key element of Monolithic’s success is its fab-less manufacturing model. This allows the company to be capital-light and deliver larger returns to shareholders. Monolithic’s recent innovations in the power management space, in particular, have allowed it to develop chips that are both smaller and more energy efficient than competitors.
Also, of note, Monolithic has significant exposure to the data center market. Nvidia’s recent earnings report was spectacular in large part due to a great acceleration of demand in the data center space. Monolithic should enjoy a similar tailwind. Indeed, MPWR stock jumped last week following the Nvidia news, but shares should have farther to run in coming weeks and months. And, over the longer-term, Monolithic’s track record speaks for itself.
Texas Instruments (TXN)
Texas Instruments (NASDAQ:TXN) is the largest player in the analog category of semiconductors. Analog chips are important because they convert real-world observations such as meteorological information into data that machines can interpret.
Certainly, analog chips are critical in various sectors. Specifically, they strengthen security and facilitate remote monitoring. Not to mention, they play a crucial role in smart cars and industrial automation. What’s more, these chips yield impressive profits. Plus, they have a longer lifespan than many other chips, ensuring more bang for the buck from research and development investments.
Furthermore, Texas Instruments combines a great business with excellent capital allocation. Management has focused its whole strategy around increasing free cash flow per share. This, in turn, is used to buy back stock and increase the company’s dividend each and every year.
Reflecting on the past two decades, TXN stock has exhibited remarkable growth. When you factor in dividends, it’s delivered a whopping total return of over 700%. Looking ahead, given the escalating demand for analog semiconductors, the future certainly appears bright for TXN’s shareholders. Overall, this makes it a strong contender for one of the best semiconductor stocks to buy.
On the date of publication, Ian Bezek held a long position in TXN stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.