Nvidia (NASDAQ:NVDA) stock is up almost 2,000% over the past five years, outshining even Bitcoin – the technology driving much of Nvidia’s growth due to chip demand.
As the saying goes: “Sell shovels during a gold rush.”
Its latest earnings per share (EPS) and revenue came in higher than expected, up 11.28% and 7.55%, respectively. But with the share price now so high, some analysts estimate Nvidia to be overvalued by as much as 170%.
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But it’s not the only stock benefitting from demand for semiconductor chips.
With that in mind, I’m investigating other chip stocks that could have longer-term growth potential.
Taiwan Semiconductor Manufacturing Company
Based in Taiwan with operations in the US, Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is the world’s leading chip manufacturer. Apple is its largest customer and although details haven’t been disclosed, Nvidia is believed to be its second-largest.
Taiwan Semiconductor recently won a $5bn US grant to build a facility in Arizona, further cementing its position as a global leader. However, with the share price up ‘only’ 270% in the past five years, returns pale compared to Nvidia.
Still, it’s such a well-established industry leader that I trust its long-term growth potential.
Looking at the financials, its price-to-earnings (P/E) ratio of 24.2 might seem high at first but is actually below the industry average of 29. This average is likely inflated due to the recent price rally in the semiconductor market.
Like many chip stocks, growth could be more subdued from here as the initial buying frenzy wears off.
A key risk is the possibility of an invasion of Taiwan by China. But the consequences of such an event would be far more significant than just the effect on Taiwan Semiconductor. Almost all global tech companies would be hit by supply issues that would hurt the entire market and we have to hope it doesn’t happen on a human level as well as a business one.
Advanced Micro Devices
Advanced Micro Devices (NASDAQ:AMD) is another stock I recently bought and it’s already netted me some decent gains.
The shares are up 44% this year and 790% in the past five years.
Although earnings are forecast to grow by 35.8% a year (above the industry average), profit margins are down from 5.6% last year to 3.8%. Possibly because forecasters are accounting for a $346m tax break it received last year, that’s unlikely to be repeated.
Still, it’s one of the most well-respected chip makers, cornering almost 20% of the semiconductor market. Moreover, it has a clean balance sheet with a very low debt-to-equity (D/E) ratio of 4.4%.
So why have insiders sold $19m worth of shares in the past three months?
It’s hard to say – but more importantly, insiders haven’t bought any shares in that time. This is a strong indication that those close to the company feel the price might be too high.
It’s a solid option but I’m glad I got in earlier.
Other options
Overall, demand for semiconductors won’t disappear any time soon but I think some of the biggest stocks have reached saturation point.
Smaller chip stocks that I think are worth investigating include Marvell Technology Group, Rambus, and Monolithic Power Systems. I’ll be covering them in more detail this month as I continue my search for promising chip stocks.
Remember — diversification is key!
