Are these the best semiconductor stocks to watch in Q1 2024?

Semiconductor companies are those involved in the design, manufacturing, and distribution of semiconductor devices and related technology.

Semiconductors — or microchips — are essential to the functioning of electronic devices and have seen particular investor interest in 2023 given the rise of the AI sector. Without semiconductors, there would be no computers, smartphones, gaming, or a hundred other applications, all of which are essential to 21st century living.

OpenAI’s revolutionary ChatGPT chatbot, the growing political importance of AI development, and Nvidia’s dizzying rally are all testament to the importance of the sector. With significant growth in AI interest expected through the next decade and beyond, investing in semiconductor stocks within a diversified portfolio could be an attractive proposition.

For context, giants including Intel and ASML consider that annual global spending on semiconductors will rise to $1 trillion by 2030, up from just $570 billion in 2022.

It’s also worth noting that China and the US are both attempting to harm each other’s ability to use advanced semiconductors to develop AI technology; the US through export bans of certain semiconductors and China through export bans of certain critical minerals.

Finally, while the five stocks listed below are considered to be the largest in the world by market capitaliaton right now, analysts disagree on what exactly constitutes a semiconductor stock, and further, these may not be the best value opportunities. And remember, past performance is not an indicator of future returns.

Best semiconductor stocks to watch

Before delving into some of the most popular individual semiconductor shares, it’s worth highlighting that there are many popular, diversified ETFs which offer exposure into multiple companies on a low cost basis.

For example, the Vaneck Semiconductor UCITS ETF holds 25 of the world’s largest semiconductor companies and is a common choice for investors who want broad exposure to the sector without the need to conduct additional research.

1. Nvidia

Nvidia shares have been on a dizzying rally this year to a $1.2 trillion valuation. The microchip behemoth is arguably the most popular semiconductor stock of 2023 — though of course, popularity does not mean it is the best investment available.

Q3 results were remarkable; revenue came in at $18.12 billion compared to the LSEG analyst consensus of $16.18 billion, a rise of 206% year-over-year. The al-important data-centre revenue rose by a whopping 279% to $15.51 billion — with half of this cash coming from cloud infrastructure providers including Amazon.

And Nvidia also expects to generate 231% revenue growth in Q4 — equivalent to $20 billion. On the other hand, it has a huge price-to-earnings ratio, alongside significant exposure to a faltering Chinese economy and rising Sino-US export tensions.

2. Taiwan Semiconductor Manufacturing Co

While Nvidia is touted as the ‘picks and shovels’ semiconductor stock for 2023, this crown could arguably belong to TSMC. Most chip producers — including Nvidia — outsource actual production to the Taiwanese company, with the country responsible for making circa 90% of the world’s most advanced chips.

TSMC shares have done well in 2023 given the AI-driven demand, its colossal manufacturing capacity and the wide economic moat surrounding starting up any sizeable competitor.

However, Taiwan’s complex political status, including its relationship with China remains a long-term
risk.

3. Broadcom

Broadcom may not be the most fashionable name in the semiconductor world, but the company’s designs and manufacturing acumen underpins masses of data centre, networking, software, broadband, wireless, storage, and industrial markets.

In Q3 results, the company saw revenue rise by 5% year-over-year to $8.88 billion, and it issued Q4 guidance for a 4% year-over-year increase to $9.27 billion. CEO Hock Tan enthused that the results were ‘driven by demand for next generation networking technologies as hyperscale customers scale out and network their AI clusters within data centers.’

With Broadcom shares up 71% year-to-date, further growth in 2024 seems possible.

4. Samsung

Samsung is a South Korean titan that is well-known as one of the world’s largest producers of electronic devices — ranging from appliances to digital media devices, semiconductors, memory chips, and integrated systems.

Recent results saw titan’s total consolidated revenue rise by 12% to KRW67.4 trillion, driven by new smartphone releases and higher sales of premium display products.

Operating profit rose to KRW2.43 trillion, based on strong sales of flagship mobile phone models and strong demand for displays. Samsung also signed a supply deal with Nvidia in September, and further collaboration remains a key opportunity in the new year.

5. ASML

ASML is a world leader in chip-making equipment. It’s a common misconception that the company actually makes semiconductors; it does not. It designs and manufactures the lithography machines that are an essential component in microchip manufacture and is therefore indispensable within the wider supply chain.

You could argue that ASML is an even more crucial to the manufacturing line than TSMC, but the stock has only risen by a comparatively smaller 23% year-to-date.

In recent Q2 results, Q2 net sales came in at €6.9 billion, with a gross margin of 51.3% and net income of €1.9 billion. And it expects Q3 2023 net sales to be between €6.5 billion and €7.0 billion alongside a gross margin of around 50%.

ASML shares have risen by 23% year-to-date yet remains some distance from previous highs — leaving possible room for further rises in 2024.