7 Best-Performing Semiconductor Stocks – NerdWallet

A couple of things, actually: They’ve all outperformed the S&P 500 by a wide margin in the last year, and they’re all semiconductor stocks.

Semiconductor stocks are shares of publicly-traded companies that design or manufacture computer chips, also known as semiconductors.

Technically speaking, a semiconductor is a material whose electrical properties allow tiny circuits to be embedded into it. But in common parlance, the word “semiconductor” refers to the products made from these materials — that is, computer chips with integrated circuitry.

There are many different types of semiconductors with different levels of sophistication, from simple chips in kitchen appliances to cutting-edge graphics processing units (GPUs) used in artificial intelligence (AI) applications.

The semiconductor industry is also differentiated into several segments, and we’ll look at some of those in a moment. First, let’s look at the top-performing semi-conductor stocks.

Below is a table of the seven best-performing stocks in the PHLX Semiconductor Index, ordered by one-year returns.

Source: Finviz. Data is current as of Jan. 29, 2024 and is intended for informational purposes only, not for trading purposes.

Just as there are many different types of semiconductors, there are many types of semiconductor stocks. These include fabrication equipment manufacturers, integrated device manufacturers, fabless designers, foundries, assembly and testing firms and distributors.

It’s worth understanding the ins and outs of these segments, as some are dominated by a small handful of firms, and others contain worldwide monopolies.

The semiconductor supply chain starts with fabrication (or “fab”) equipment manufacturers — the people who make the machines that semiconductor companies use to fabricate chips by embedding tiny circuits into semiconductor materials.

There’s actually only one company in the entire world that knows how to make the machines needed to fabricate advanced semiconductors: ASML (ASML).

ASML is a Netherlands-based firm whose machines use ultraviolet lasers to etch circuitry into semiconductors. This process, which is called extreme-ultraviolet (EUV) photolithography, relies on incredibly complex physics. ASML invented it, and is the only company that understands it well enough to provide it commercially.

ASML controls most of the global photolithography market, and has an absolute monopoly on EUV photolithography, which is necessary for the fabrication of all but the simplest semiconductor chips.

There are, however, other fabrication equipment manufacturers that use non-EUV technologies. Lam Research and Entegris are both examples.

Integrated device manufacturers (IDMs) are companies that make electronic devices like computer processors from start to finish — they design their own semiconductor chips, fabricate them in-house, and then assemble them into finished electronic components. Intel, Micron (MU) and Texas Instruments (TXN) are all examples of IDMs.

The IDM model is one of two semiconductor manufacturing schemes. The other is the “fabless-foundry” model, in which design, fabrication and assembly are all outsourced to separate, specialized firms.

Fabless semiconductor designers are firms that only invent new types of semiconductors, and outsource the actual manufacturing to foundries.

GPU makers like NVIDIA and AMD are examples of fabless designers. Broadcom, Marvell and Rambus are also part of this segment.

Semiconductor foundries manufacture semiconductors on behalf of fabless design firms.

This segment is dominated by Taiwan Semiconductor Manufacturing Co. (TSM), which controls more than 50% of the global market for foundry services. There are a few smaller firms in this segment as well: Globalfoundries (GFS) and United Microelectronics (UMC) are minor players in the semiconductor foundry market.

The final segment of the fabless-foundry model is outsourced assembly and testing (OSAT) — which, as its name implies, consists of companies that test semiconductors and assemble them into finished electronic components on behalf of fabless designers and foundries. Amkor (AMKR) is an example of an OSAT stock.

When we talk about the “finished electronic components” produced by the IDM and fabless-foundry models, we’re talking about computer parts, like processors and GPUs — not consumer products.

This segment of the semiconductor industry consists of distributors — companies that buy these things and then resell them to consumer electronics manufacturers, who put them in consumer products like laptops and appliances; or to AI or cloud computing companies, who use them in data centers.

Arrow Electronics (ARW) and Avnet (AVT) are examples of semiconductor distributor stocks.

Due to the relative scarcity of its companies — and its growing importance to AI — the semiconductor industry has a unique set of upsides and downsides for investors, relative to other tech stocks.

• Lack of competition: Two segments of the semiconductor industry — photolithography and foundries, both of which are critical to the global electronics supply chain — are dominated by single firms (ASML and TSM, respectively). It’s hard to invest in the wrong photolithographer or foundry when there’s only one major player in each segment.

• AI-related momentum: GPUs have become the preferred hardware for running AI models like GPT (the AI behind ChatGPT). Fabless semiconductor designers like NVIDIA have benefitted from a perception that their GPUs are in high demand from AI companies like Microsoft (MSFT), as well as from AI research organizations like OpenAI.

• Geopolitical risk: Taiwan is a crucial part of the global semiconductor industry, given TSM’s position as the globally-dominant semiconductor foundry. That puts the industry at risk if, for example, China were to invade Taiwan, which Chinese leader Xi Jinping has indicated is a possibility.

• Regulatory risk: There’s a downside to the importance and low headcount of the industry — governments increasingly see control of semiconductor technology as a national security matter. Many Western governments, including both the Trump and Biden administrations, have restricted semiconductor exports to China, hurting the sales of companies like NVIDIA and bringing volatility to semiconductor stocks.

If you’re interested in investing in semiconductor stocks, you’ll need to open brokerage account first if you don’t already have one.

Individual semiconductor stocks, as mentioned above, can provide market-beating returns — all of the stocks in the table above at least doubled the S&P 500’s performance between Jan. 2023 and Jan. 2024. But there is always the possibility they’ll trail the market at points, too.

Semiconductor shares also can be expensive — NVIDIA, for instance, traded above $500 in Jan. 2024. That could make it unaffordable for some investors whose brokers don’t offer fractional shares.

Another option is to invest in semiconductors via semiconductor ETFs, which can give you exposure to dozens of semiconductor stocks in a single purchase, and often for much less than the cost of one NVIDIA share.

It’s still important to research ETFs before investing, just as you would research stocks. Check out an ETF’s holdings, expense ratio and historical performance before buying.