These Are the 3 Best Semiconductor Stocks to Buy

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Semiconductor stocks have seen some increased volatility of late, as investors increasingly scrutinize these companies more closely. There's good reason for this - valuations do look to be getting stretched in many corners of the market. For certain chip stocks, it does appear that the market may have gotten ahead of its skis, so to speak, on its forward growth estimates. After all, we really do have no idea how much future demand has been pulled forward - we'll only know in retrospect looking back.

Accordingly, determining which chip stocks are the best picks in this current market isn't an easy task. Valuations are all over the place, as are growth expectations. Indeed, if there ever was a sector where modeling out future growth made sense, this would probably be it.

Let's try to do just that. The following three chip stocks could be among the best picks in this sector for those with a long-term investing horizon. Here's why I think that's the case.

Key Points About This Article:

• Valuations among top chip stocks have begun to diverge in a big way, with this sector becoming one of the most difficult to value overall.
• Here are three top chip stocks investors may want to start doing their homework on, and try to model out their current valuations relative to how quickly they're expected to grow over time.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand new “The Next NVIDIA” report . It features a software stock we’re confident has 10X potential.

ASML Holdings (ASML)

Photo of what appears to be an ASML office building

A tech giant specializing in producing silicon wafers, ASML Holdings ( NASDAQ:ASML ) is much more of a picks-and-shovels play on the chip sector than a pure-play chip stock itself. The company has been affected by slowing demand expectations in this sector, as recession concerns have risen. It's also worth noting that the company's price-sales multiple does remain high at around 11.5-times, but it's also not excessively elevated on a historical basis.

In February, ASML unveiled the world's first High-NA lithography machine , advancing to print sub-2nm transistors. By April, the company successfully printed DRAM and logic patterns, collaborating with Imec to demonstrate its capability for producing 9.5nm patterns. This collaboration is expected to pave the way for 1.4nm chip production, continuing the company's focus on creating the smallest chips imaginable.

Impressively, ASML reported $6.79 billion in sales in its June quarter, surpassing estimates. The company did, however, fall short on earnings, with the company's bottom line figure actually dropping 21% year-over-year.

and sales also declined 12%. For the current quarter, ASML lowered its revenue guidance to $7.66 billion sales, which is below analyst estimates of $8.24 billion. That said, this number will still represent strong growth over last year's $7.03 billion brought in during the same quarter.

To be fair, ASML stock is a more difficult option to value in this space. However, the company's extreme ultraviolet lithography equipment is essential for chip production. If we're going to see the latest and greatest chips brought to the market, ASML is going to lead the way on the technology front. In other words, this company's value is immense, and I don't think that's going to change anytime soon.

Taiwan Semiconductor (TSM)

A Taiwan Semiconductor office building

Surging 64% year-to-date, Taiwan Semiconductor ( NYSE:TSM ) is a stock that's currently riding the wave of strong AI chip demand higher. One of the leading chip makers, providing chips for high-profile companies like Nvidia and AMD, Taiwan Semi has seen its revenue absolutely rocket higher. In July, the company reported 45% revenue growth, which led TSM stock to surge 1.5% higher alongside other chip names. Analysts are forecasting growth will continue to come in around 37% in future years, an impressive feat to say the least.

TSMC is the largest contract chipmaker in the market, and it has been exceeding expectations when it comes to creating advanced chips for diverse sectors. The company has continued to serve a wide range of mega-cap tech companies like Apple, Nvidia, and AMD, adding to its scale and importance in the market. TSMC is known for its 3nm and 5nm technologies, with the company remaining a pivotal player in the semiconductor supply chain.

The company's strong revenue growth posted this past quarter can be tied directly to strong customer demand. Whether it's demand from Meta, Apple, Nvidia or a range of other companies looking to advance their AI capabilities, TSM directly or indirectly provides the chips needed to support this revolution. As more advanced technologies are developed, TSMC believes it will continue to grab more market share. Thus, for those thinking long-term about these trends, this is a stock to consider owning in my view.

Nvidia (NVDA)

Nvidia CEO Jensen Huang on stage at a CES event

Nvidia ( NASDAQ:NVDA ) stock dropped nearly 20% last month, but Mizuho is among the analysts that sees significant upside, citing strong demand for its GPUs (and particularly its Blackwell chips). Mizuho advised investors to focus on Nvidia's robust market position and potential for higher chip prices. The firm raised its price target for Nvidia to $132, forecasting a 26% increase.

Currently, analysts project Nvidia will continue to grow its revenue at an incredible 68% compounded annual growth rate (CAGR) for the next 8 years. This should propel Nvidia to an even higher price over time, assuming the company's multiple slowly comes down as many expect.

We'll have to see if the momentum can continue. Indeed, plenty of investor attention will be paid to the company's upcoming earnings. That's because the previous earnings beats, such as those seen in Nvidia’s Q2 2023 earnings , which showed a 107% revenue growth year-over-year, will need to continue. Nvidia's dominance in the AI chip space is undeniable, with the company becoming the most valuable in the world by market capitalization for good reason.

Of course, Nvidia's valuation bakes in plenty of growth, so whether this stock is truly a buy at current levels really depends on an individual investor's view of how the company will continue to perform over the next five to 10 years. In my view, Nvidia's past performance does appear to be indicative it will continue to outperform over time. In other words, I'm among the group that thinks, until proven otherwise, this is a company with about the most robust tailwinds in the market right now. Accordingly, on pullbacks, I think this stock looks like a buying opportunity here.

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