The arms race in artificial intelligence (AI) is creating a favorable demand environment for major semiconductor companies. He PHLX Semiconductor Sector The index has soared 122% since bottoming in 2022, far outperforming the 69% performance of the technology-focused sector. Nasdaq Composite.
While the chip industry experiences occasional dips in revenue, the sector has been on a steady upward trajectory since the 1980s. Growing demand for high-performance chips to support the build of AI servers should lead to many years of strong growth for leading suppliers.
Here are two top semiconductor stocks with potential for outperformance over the next decade.
1. Arm restraints
Arms (NASDAQ: ARM) It may not be as familiar to some as Intel, but it is one of the leaders in the semiconductor industry. It licenses designs for central processing units (CPUs) used in Arm-based Windows PCs, smartphones, supercomputers, and cloud servers.
Because it generates revenue from licenses and royalties, it is a very profitable business that can generate superior returns for shareholders.
Arm is currently seeing strong adoption of its Armv9 technology due to its improved performance and power efficiency. His experience in designing efficient, low-cost chip technology will be beneficial for power-hungry data centers.
Royalty revenue increased 37% year over year last quarter, indicating market share gains in the cloud computing market. All major cloud providers, including AlphabetIt’s Google, Amazonand microsoft, they are using Arm-based chips. Its integration with NVIDIAThe Grace CPU positions Arm as a leading provider 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 see similar gains as the PC market shifts away from Intel’s traditional x86 processors toward Arm-based chips .
The biggest risk for Arm investors is the stock’s high valuation, which looks expensive with a forward price-to-earnings ratio of 100 based on this year’s earnings consensus estimate. It’s still worth pulling the trigger because Arm is becoming the gold standard of CPU technology in major computing markets.
Its lucrative licensing and royalty-based business model should support strong earnings growth and shareholder returns over the long term.
2. Micron technology
Micron technology (NASDAQ:MU) is one of the leading suppliers of dynamic random access memory (DRAM) and non-volatile memory (NAND) used in various products, but primarily in PCs and data centers. Stocks have reached new heights this year, as high-performance memory modules are starting to see explosive demand from AI servers.
The memory and storage markets are known for cyclical swings in demand and prices. Last year, falling memory prices were the main factor causing the semiconductor industry to report an 8% drop in revenue.
But AI is pulling Micron’s business out of the crisis, boosting the company’s revenue up 58% year over year in the most recent quarter, and management expects further growth.
Most importantly, Micron’s bottom line is benefiting from a shortage 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 pricing trends and thus drive the company’s earnings growth.
The risk is that a sharp increase in spending on data center infrastructure could create an oversupply of chips for the data center market and put pressure on memory sales prices. However, Micron has another card up its sleeve to drive growth: the recovery of the consumer PC market. The company is performing well to start the year, but it is not yet operating at full capacity.
The cyclical nature of the business is the main risk to watch, but the current consensus estimate sees earnings per share reaching $1.02 this fiscal year before rising to above $9 next year. Demand for AI could drive new all-time highs in revenue and profits, which could send Micron’s stock price soaring in the coming years.
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Alphabet executive Suzanne Frey 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 at Nvidia. The Motley Fool has positions and recommends Alphabet, Amazon, Microsoft and Nvidia. The Motley Fool recommends Intel and recommends the following options: long $45 January 2025 calls on Intel, long $395 January 2026 calls on Microsoft, short $35 August 2024 calls on Intel, and short $35 calls on $405 in January 2026 at Microsoft. The Motley Fool has a disclosure policy.
Two Semiconductor Stocks to Buy and Hold for Big Long-Term Potential was originally published by The Motley Fool