A 2015 Nielsen report estimated that Americans spent roughly 11 hours each day in front of screens. By 2020, according to a poll by Vision Direct (an admittedly biased source given their interest in eye health), that number had risen to 17 hours each day before the pandemic and an astonishing 19 hours each day during the pandemic. Per People, which compiled the statistics from the poll, that would translate to roughly 40 years of screen time during the average adult’s lifetime. What does that have to do with the best chipmaker stocks?
Well, the world is becoming more digitized and automated, not less. And everything from smart fridges, to entertainment, to automated manufacturing and electric vehicles (EVs) runs on chips. According to recent research by IDTechEx, just shifting to battery-electric vehicles will more than double the semiconductor content of personal vehicles.
Source: Infineon, IDTechEx “Power Electronics for Electric Vehicles 2022-2032"
And as the pandemic supply shortages have shown us, we may not always be able to source chips internationally. That’s where one of the best chipmaker stocks of 2022 comes in.
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Best Chipmaker Stock #1: Microchip Technology (MCHP)
Microchip Technology (MCHP) is an Arizona-based manufacturer of microcontrollers and integrated circuits, among other things, that capitalized on last year’s supply-chain shortages to invest in new equipment and hire on additional personnel in the hopes of meeting increased chip demand domestically.
Over the last 25 years, Microchip Technologies has grown its microcontroller market share from 10th worldwide to third and has been rapidly closing in on the industry leaders. The biggest revenue contributors are Industrial, Data Center/Computing, and Automotive but it believes that two mega-trends—Data Centers and the Internet-of-Things (IoT)—will become significant factors over the next several years.
From a fundamental perspective, the company has been growing free cash flow at a 20% compound annual rate and is aggressively cutting debt. In fact, they’ve paid down $4.98 billion of debt in the last 15 quarters, which came on the heels of the acquisition of Microsemi.
A big part of that debt buyback was convertible debt that was potentially dilutive to shareholders, which is just one of the shareholder-friendly actions in the pipeline and one of the factors that makes this one of the best chipmaker stocks.
The company also intends to return that growing free cash flow to shareholders via dividends and buybacks with a goal of increasing dividends and buybacks when key leverage ratios are reached. The company currently returns 23% of free cash flow to shareholders and plans to raise that to 50% when debt ratings further improve, then gradually to 100% as the company deleverages to a 1.5x debt/EBITDA ratio.
Technically, the stock is starting to show signs of life, pushing above its 50-day moving average though still shy of its 200-day moving average. You can buy it here or on any move above that 200-day line.
Best Chipmaker Stock #2: Nvidia (NVDA)
Our second selection of the best chipmaker stocks to buy now emphasizes digitization over automation (although they’re working to develop their exposure to the automotive segment). Nvidia (NVDA) is a pioneer in graphics processing and has been one of the go-to suppliers for gamers for the last two decades.
Nvidia’s graphics processing units (GPUs) are highly sought after for both rendering virtual worlds and mining cryptocurrency. Although the pending shift to Proof of Stake (blockchain validation based on how much of the underlying cryptocurrency someone has) from Proof of Work (blockchain validation based on how quickly a holder can solve a cryptographic equation) will reduce some of the demand for processors, Nvidia will remain one of the biggest players in graphics chips for the foreseeable future.
The company has doubled revenues over the last three years and boasts triple the revenue of the next largest PC GPU supplier. Their Datacenter exposure is also rapidly expanding. They currently provide GPUs to every major cloud provider, including Google, Microsoft, Alibaba, Amazon and IBM, and boast an 82% cumulative annual growth rate for that segment since 2017.
Nvidia is positioning itself for the future, with a strong emphasis on ESG and a focus on using artificial intelligence to optimize its suite of products. If virtual and augmented reality are coming, they’re going to run on Nvidia.
As for the stock, it’s down 39% YTD (and not alone there among high-growth names) but is up 23% in the last month. Like MCHP, it recently pushed above its 50-day average though remains shy of the the 200-day line. It looks buyable here.
Macro trends suggest that the future will be digital and automated, and these are two of the best chipmaker stocks to cash in on those trends.
Do you own any chipmaker stocks that aren’t on this list?
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*This post has been updated from an original version.
