The age of artificial intelligence could do wonders for these leading chip companies.
The artificial intelligence (AI) arms race is creating a favorable demand environment for major semiconductor companies. of PHLX Semiconductor Sector the index is up 122% since the end of 2022, far outpacing the 69% return of tech-centric Nasdaq Composite.
While the chip industry experiences occasional revenue declines, the sector has been on a steady growth trajectory since the 1980s. Growing demand for high-performance chips to support AI server construction should create many years of growth. strong for key suppliers.
Here are the two best semiconductor stocks with high return potential over the next decade.
1. Arm Holdings
Arm Holdings (ARM -0.29%) may not be so familiar to some Intel, but is one of the leaders of the semiconductor industry. It licenses designs for central processing units (CPUs) used in Windows Arm-based computers, smartphones, supercomputers and cloud servers.
Because it generates revenue from licensing and royalties, it is a highly profitable business that can deliver superior shareholder returns.
Arm is currently seeing strong adoption for its Armv9 technology due to better performance and power efficiency. Its expertise in designing low-cost and efficient chip technology will be beneficial to power-hungry data centers.
Royalty revenue rose 37% year over year last quarter, showing market share gains in the cloud computing market. All major cloud providers, incl Alphabetgoogle it, AmazonAND Microsoft, are using arm-based chips. Its integration with NvidiaGrace CPU positions Armi as a leading supplier of AI applications in data centers.
Another growth opportunity is AI-enabled PCs. Arm-based chips are the standard used in 99% of the world’s smartphones and could have similar benefits as the PC market moves away from traditional x86 processors from Intel to Arm-based chips.
The biggest risk for Arms investors is the high valuation of the stock, which looks expensive at a price-to-earnings ratio of 100, based on the consensus estimate of this year’s earnings. It’s still worth pulling the trigger because Arm is becoming the gold standard of CPU technology in all major computing markets.
Its profitable business model based on licensing and royalty income should support strong revenue growth and shareholder returns over the long term.
2. Micron Technology
Micron Technology (MU -3.23%) is a leading supplier of dynamic random access memory (DRAM) and non-volatile memory (NAND) used in several products, but mostly in PCs and data centers. The stock has risen to new heights this year, as high-performance memory modules have begun to see increased demand from AI servers.
The memory and storage markets are notorious for cyclical fluctuations in demand and prices. Last year, falling memory prices were the main factor that caused the semiconductor industry to report an 8% decline in revenue.
But AI is pulling Micron’s business out of the doldrums, growing the company’s revenue 58% year-over-year in the most recent quarter, and management expects more growth.
More importantly, Micron’s bottom line is benefiting due to the short supply of high-performance memory chips. In the fiscal second quarter, the company reversed last year’s earnings per share loss to a profit of $0.71. Strong demand from the data center market should support favorable price trends, and therefore boost the company’s earnings growth.
The risk is that a sharp increase in data center infrastructure spending could create an oversupply of chips for the data center market and affect memory sales prices. However, Micron has another card up its sleeve to drive growth, which is a recovery in the consumer PC market. The company is doing well to start the year, but it’s not firing on all cylinders just yet.
The cyclical nature of the business is the main risk to watch out for, but the current consensus estimate has earnings per share reaching $1.02 this fiscal year before rising to over $9 next year. Demand for artificial intelligence could lead to new record levels of revenue and profits, which could drive Micron’s stock price higher over the next few years.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short August 2024 $35 calls on Intel, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
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