February 23, 2021

Author: Tim Phillips

Semiconductor stocks

All the “noise” of falling stock markets shouldn’t deter long-term investors from identifying great businesses and picking them up at a discount.

One of those that will likely continue to do very well this decade is the semiconductor industry. That’s because chips of all sizes go into every device that we use.

I’ve written previously about one of the leading semiconductor foundries, Taiwan Semiconductor Manufacturing Co Ltd (NYSE:TSM) (TPE: 2330).

While foundries manufacture the actual semiconductors, the ones who design them also have a huge influence on the overall direction of the industry.

Dubbed “fabs”, these companies outsource the manufacturing of the chips to the likes of TSMC. Despite that, they are the ones creating the intellectual property (IP) of the chip architecture.

That has proved to be an extremely rewarding space for long-term investors. With that, here are two chip fabs that I think will continue to do well throughout the 2020s.

1. Nvidia

One of the best-known names in the chip space is Nvidia Corporation (NASDAQ: NVDA). That’s no surprise because the firm has excelled over the past five to ten years.

Nvidia shares are up over 15x since February 2016 and in 2020 overtook Intel Corporation (NASDAQ: INTC) as one of the most valuable semiconductor companies in the world.

One of the key reasons for its astounding success has been its dual-track approach to designing cutting-edge, high-performance chips for both online gaming and data centres.

In its latest third-quarter earnings, Nvidia posted solid 57% year-on-year growth in revenue to US$4.73 billion, way ahead of its guidance of around US$4 billion.

Even more impressive, Nvidia’s operating income skyrocketed 115% year-on-year to US$1.4 billion as its gross margin also expanded to 62.6%.

Overall, the popularity of graphics processing units (GPUs) has been what has turbocharged Nvidia’s growth as GPUs displaced the traditional dominant mantle of CPUs.

With everything from AI and complex gaming graphics to Internet of Things (IoT) and data centres, Nvidia’s chips will likely be a vital component in the technology world for years to come.

2. Advanced Micro Devices

Second is Advanced Micro Devices Inc (NASDAQ: AMD), also known as AMD. About five or six years ago, AMD was suffering as its focus on low-performing chips resulted in a loss of market share and revenue in the early 2010s.

However, since having current CEO Lisa Su take over the top role in late 2014, AMD has been a remarkable turnaround story in the semiconductor space.

Her focus on the high-performing CPU space and the gaming GPU space sparked a turnaround in AMD’s fortunes.

In AMD’s latest fourth-quarter and full-year 2020 results, the firm had record revenue of US$9.74 billion for the whole of last year. That was up 45% from 2019.

Meanwhile, its fourth-quarter revenue of US$3.24 billion was up 53% year-on-year and was also a record quarter for AMD.

On the cash flow side, the picture was just as bright. AMD’s operating cash flow increased 25% year-on-year in the fourth quarter to US$554 million while its free cash flow came in at a record US$480 million – an increase of 20% year-on-year.

Taking the lead

For investors looking at buying the leaders within the chip design space, Nvidia and AMD have proven themselves to be at the head of the pack.

If you’re looking to tap into the big trends of AI, data centres, online gaming and IoT, both companies look set to reward investors over the long term.

Disclaimer: ProsperUs Head of Content Tim Phillips owns shares of Taiwan Semiconductor Manufacturing Co Ltd.

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