Here are two stocks long-term investors should buy to ride the semiconductor growth story. –
Semiconductors are what drive the world’s computing power. Without them, your Apple Inc (NASDAQ: AAPL) iPhone, PC laptop or your smart speaker, such as Amazon.com Inc’s (NASDAQ: AMZN) Alexa wouldn’t be able to function.
They are, quite literally, what makes global electronic devices tick. Yet, the sector doesn’t offer up the “sexiness” to investors that such blockbuster tech stocks like Apple or Amazon do.
Yet I believe longer-term investors can tap into a range of huge tech trends – such as the Internet of Things, 5G or Artificial Intelligence (AI) – by buying the best semiconductor stocks.
With that, here are two of the best semiconductor stocks to buy and hold for the long term.
Taiwan Semiconductor Manufacturing Co Ltd (NYSE: TSM) (TPE: 2330), also known as TSMC, is the world’s leading semiconductor “foundry”. Basically a foundry builds the chips that have been designed elsewhere by “fabless” companies.
The fabless firms are the ones that design the chips, so think of well-known companies such as Nvidia Corporation (NASDAQ: NVDA).
However, foundries such as TSMC can tap into the rising demand from fabs to manufacture the actual chips. One of the best things about TSMC is its market dominance in chip production.
The company is technologically far ahead of its competitors such as Intel Corporation (NASDAQ: INTC) and Semiconductor Manufacturing International Corporation (SEHK: 391), otherwise known as SMIC.
Its latest earnings beat on both the top and bottom lines, while it also raised its guidance. Sales growth for 2020 is now forecast to top 20% after management previously guided for mid- to high single-digit percentage growth.
Even without the sizeable business from politically-sensitive Huawei, TSMC has easily back-filled its capacity from other clients looking to ramp up chip production.
This is the leading chip foundry in the world and as TSMC continues to widen its competitive advantage, investors can also receive a tidy 2.3% dividend yield.
2. ASML Holdings
ASML Holdings N.V. (NASDAQ: ASM) (AMS: ASML) may not be a household name in the semiconductor industry. Yet the company is crucial to the production of chips.
That’s because it manufactures the highly-technological machines that actually produce the chips. And it does this extremely well. These machines, known as photolithographic machines, use extreme ultraviolet (EUV) light, with wavelengths as tiny as just 13.5 nanometres.
These tiny wavelenths of lights make it possible to etch ever small chip components onto transistors. Although ASML has Japanese firms such as Canon and Nikon as competitors, according to the Economist, the firm’s market share has doubled to 62% since 2005.
Like TSMC, it’s the market leader and its foundry clients (including TSMC, Intel and Samsung) mean ASML can serve a wider range of potential customers.
The company has been on a formidable run as net sales in Q2 2020 increased to €3.32 billion (US$3.88 billion), up from €2.44 billion in Q1 2020 – clocking in an unbelievable 35% expansion quarter-on-quarter.
ASML is a Dutch company but has shares listed in both Amsterdam and New York (on the Nasdaq) – the latter of which is easier for international investors in Asia to access.
For investors looking to tap into the story of semiconductor, these two under-the-radar stocks could produce significant returns over the long run.
Both produce absolutely essential kit for technology companies. And with both the market leader in their respective segments, there’s a high likelihood TSMC and ASML will continue to reward patient shareholders.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Hong Kong contributor Tim Phillips owns shares in Taiwan Semiconductor Manufacturing Co Ltd.
The Motley Fool Hong Kong Limited(www.fool.hk) 2020