This article will run through the best semiconductor stocks to purchase in the market.

Semiconductor stocks have long been a central part of the American and world economy. Demand for semiconductor increases as the demand for technology increases, and the demand for technology has been increasing at an alarming rate.

When it comes to semiconductor stocks, there is tremendous competition because semiconductors are driven by three simple concepts: size, speed, and cost. In other words, companies must constantly make their products smaller, faster, and cheaper.

Unfortunately, that also creates challenges for finding solid semiconductor stocks, because there is constant pricing pressure is all the companies compete against each other.

There is also a constant drag on profits because of the need for research and development. In order to make these smaller, faster, and cheaper chips, it means semiconductor companies need to spend a lot of money to continue to maintain their competitiveness.

The Best Semiconductor Stocks For 2019

If you’re in a hurry, below are our picks for the most valuable semiconductor stocks as of this writing.

1. Intel Corporation: The market leader and dominant player
2. Advanced Micro Devices: Rapidly increasing market share
3. Nvidia: Best positioned for new markets

Keep reading and you’ll learn more about each of these semiconductor stocks and my thoughts on each.

What Are Semiconductor Stocks?

Semiconductors are substances that permit electrical current to travel through them. As far as the stock market goes, semiconductor stocks mostly relate to companies that produce microchips that make our electronic devices work the way they do.

When demand exceeds supply, chip makers do extraordinarily well. But like all markets, things that use microchips can go through cycles. So, if many of the end products that use microchips all find themselves in a down cycle, chip makers can struggle.

Because of that cyclicality, and because chip makers are also involved in a commodity business, even the best semiconductor stocks tend to have much higher risk than most of the rest of the market.

There are different elements that drive semiconductor stock prices.

The first, and the one that gets most of the publicity, is the extent to which a chip maker is gaining share in the market. The more market share that a company starts to get, the more revenue it makes and the more earnings it will have.

Another thing to look for are increasing profits, the more that fixed costs are absorbed, the lower the cost per unit will be. As a result, there will be efficiencies in the manufacturing process that leads to higher profits.

Finally, like just about every other product in the market, the microchips that perform better than the competition are likely to see increasing business, and therefore increasing profits.

Read Also: What are the best mid-cap stocks to own?

How Do You Determine What Qualifies As The Best Semiconductor Stocks?

The best performing semiconductor stocks usually have at least one of the following characteristics:

1. High or growing market share
2. Consistent and positive free cash flow
3. Robust R&D budget

High or Growing Market Share

While market share is critical in any competitive market, having a larger market share is particularly critical in a commodity business.

That larger market share means that a company is going to be more difficult to dislodge from its leading position, meaning it will continue to generate the most free cash flow and profits.

It also means that the products likely have a better reputation, meaning better performance over the long term, than its competitors.

Consistent and Positive Free Cash Flow

Consistent and positive free cash flow is a critical part of any business. However, when it comes to a commodity driven business that is also highly dependent on research and development, having that cash flow to fund research and development will determine the life or death of a company.

Thus, when times are good, a successful semiconductor company will be generating a lot of free cash flow to allow it to operate and continue important research during the lean times.

Semiconductor stocks without that kind of consistent and positive free cash flow may find themselves struggling to keep up with demand during good times, and not have enough money to maintain research during any period.

That could cause them to significantly lose market share and possibly die on the vine.

Robust research and development

The final category that allows a company to be one of the top performing semiconductor stocks is R&D, or research and development.

With every other company in the market plowing ahead to make faster, smaller, and cheaper products, successful semiconductor stocks must have a pro-active and aggressive approach to developing new products.

This is an arena where every little advantage matters, and if a company can stay a half-step of a competitor, it could literally translate into billions of dollars of revenue differences between them.

Here’s a video that gives additional information on investing in semiconductor stocks.

Intel Corporation

What is it?

Intel is the dominant player in the microchip market. After being the 800-pound gorilla in its PC-centric business for decades, it is now morphing its business towards a data-centric approach.

What makes it a good stock?

Intel was smart enough to realize that the PC industry has pretty much slowed to a crawl since everyone in the world has a PC at this point. Credit good management with knowing that it was time to kick into high gear in a new market.

As a result, all of Intel’s financial metrics exploded upward, making it one of the top semiconductor stocks in the market.

2015 revenues of $55.3 billion went to $62.7 billion in 2017, and hit $69 billion in the trailing twelve months.

2015 profits of $11.4 billion hit $15.2 billion in in the trailing twelve months. As you can see, that means net profit margin of about 20% in 2015 is now 22%.

There are a few near-term issues for Intel that it should grow out of. Competitors have a bit of a head start on producing chips for the next generation of servers. That may lead to some temporary loss of market share, but should hit volume production next year.

Advanced Micro Devices

 

 

What is it?

AMD is a global semiconductor company that primarily offers microprocessors, as well as server and embedded processors for all kinds of electronic equipment.

What makes it a good stock?

Earlier, I wrote about how market share is one of the fundamental items that can drives companies into the realm of best semiconductor stocks. Sure enough, Advanced Micro Devices stock has been on a tear this year because of big gains in market share.

Just as I mentioned above, because Intel ceded its lead in chip production to competitors, AMD grabbed ahold of that lead and is running with it.

In fact, some analysts project that AMD might control as much as 10% market share in the server market – whereas it used to be less than 1%. That’s how tough competition is, and you can see what happens if a company loses pace – even a juggernaut like Intel.

You can see this impact in AMD’s financial statements. Revenue of $4 billion in 2015 hit $5.3 billion in 2017 and $6.5 billion in the trailing twelve months.

AMD was actually losing a lot of money — $500 million in 2016. It broke to a $43 million profit in 2017, but now is at a whopping $360 million in the trailing twelve months. Once again, that’s how much market share can matter to a company.

We see it with free cash flow, as well. AMD was regularly generating negative free cash flow. In the trailing twelve months, it is now positive to the tune of $320 million.

Read Also: What’s our prediction for AMD stock?

Nvidia

 

 

 

What is it?

Rounding out our list of best semiconductor stocks is Nvidia, and it is winning the game as one of the top semiconductor stocks by going after markets that other companies aren’t. These are markets that include data-centers, artificial intelligence, automation, Internet of Things, augmented reality, and virtual reality (VR).

What makes it a good stock?

These are brand new markets that are just getting started. Things like AR and VR are not only for entertainment. They will become vital in multiple applications, such as training and education for all kinds of industries – from aerospace to surgery.

The AR and VR markets are pegged to grow at a 50%-plus rate over the next five years. The Internet of Things market is projected to be a 25%-plus growth market over the next several years.

Nvidia’s revenue has exploded from $4.7 billion in 2015 to $12.5 billion in the trailing twelve months. $614 million in net income in 2015 is now $4.7 billion in the trailing twelve months – a nearly eight-fold increase.

Read Also: What’s our prediction for Nvidia stock?