For me, Taiwan Semiconductor Manufacturing Co (NYSE:TSM) and Qualcomm (NASDAQ:QCOM) are two semiconductor stocks to buy and hold. Growth stocks have seen their shares prices fall in recent months. But I’m confident about the long-term growth potential of the semiconductor industry. Semiconductors are critical components that power electronics from computers to car. That’s one reason why I’m backing these firms to deliver growth.
Qualcomm
Qualcomm creates semiconductor software and is a leading producer of application processors, integrated GPUs, and baseband modems for mobile devices. The San Diego firm has a massive portfolio of wireless patents, giving it a cut of millions of smartphones sold worldwide.
It’s one of the biggest players in the supply of mobile system on chips (SoCs). According to Counterpoint Research, its market share rose 7% year-on-year to 30% by the end of 2021. Part of the growth was down to the company’s capacity to navigate the global chip shortage. The firm decided to multi-source key products from its vendors, enabling it to avoid bottlenecks. It also prioritised higher-end Snapdragon SoCs that have better margins.
The stock has performed better than the index over the last five years, and is up around 150% despite a recent slide. There’s concern that a global slowdown in the purchase of mobile phones could reduce growth prospects for this one. But Qualcomm is also diversifying its portfolio with new chips for Internet of Things (IoT) devices, servers and connected cars.
The share price has been on a downward trend over the last three months and it has a lower price-to-earnings ratio than its peers. I’m looking to add this stock to my portfolio.
Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing is the world’s largest manufacturer of semiconductors by market share and has benefited from the current demand for chips. On April 14, the company said its net revenue for the latest quarter had grown by 35.5% year-on-year to $17.6bn, driven by its HPC and automotive market demand.
In 2021, TSMC generated $56.8bn in revenue with 41% operating margins. This translates to $23.3bn in operating income. The firm could be delivering $46.8bn in operating income in 2026 if revenue can grow at 15% a year as management is predicting. The Hsinchu-based company estimates revenue will actually grow between 15% and 20% until 2026. Reports today suggest it will ship over $17bn worth of chips to Apple in 2022, that’s a gain of 23% from 2021.
The firm is also well positioned to benefit from the current shortage of semiconductors. Taiwan is known as a hub for the manufacture of these important components and much of this is due to TSMC. It accounted for a whopping 54% of total foundry revenue globally in 2020, according to TrendForce data.
Some analysts are waiting for the point at which supply outstrips demand for chips. But, while I’m here for the long run, BMW’s CEO recently said he foresaw the shortages continuing through to 2023.
For me, there is some concern that geopolitical changes, including a more assertive China, could impact TSMC’s operations. Equally, any global economic slowdown could see supply outpace demand quicker than expected.
TSMC has a very dominant position in the market and should benefit from economies of scale. I already own Taiwan Semiconductor Manufacturing stock and am looking to buy more.