Semiconductors have been called the oil of the 21st century as they are driving growth in the global economy. The technology found in these tiny chips powers everything from advanced quantum computers and artificial intelligence (AI) to sophisticated military weapons and the vehicles we drive.
As such, semiconductors are also a source of escalating global tensions as nations seek to protect proprietary technology. For instance, the CHIPS and Science Act of 2022 is not only aimed at bolstering the domestic semiconductor market. It also explicitly states that its goal is to “counter China,” ensuring that recipients of the $52.7 billion allocated “for American semiconductor research, development, manufacturing, and workforce development” “do not build certain facilities in China and other countries of concern.”
As the importance of chips grows and countries continue to raise the stakes, investors can reap the rewards. Here are three of the best semiconductor stocks to buy for long-term gains.
| TSM | Taiwan Semiconductor Manufacturing | $83.04 |
| NVDA | Nvidia | $281.54 |
| INTC | Intel | $29.84 |
Taiwan Semiconductor Manufacturing (TSM)
Famed investor Warren Buffett made headlines last year when he bought a $4.1 billion stake in Taiwan Semiconductor Manufacturing (NYSE:TSM), only to scale it back dramatically a few months later. In a recent interview, Buffett conceded that geopolitical tensions were “a consideration” in the decision to reduce Berkshire Hathaway’s (NYSE:BRK-B) position by 86%. However, Buffett still has around 8.3 million shares of the stock, which has many of the attributes he looks for in an investment.
“Taiwan produces over 60% of the world’s semiconductors and over 90% of the most advanced ones,” reports The Economist. “Most are manufactured by a single company, Taiwan Semiconductor Manufacturing Corporation (TSMC). Until now, the most advanced have been made only in Taiwan.”
This is what Buffett would call a “wide moat.” In fact, semiconductors are so important to Tawain and, in turn, the global economy, that some call it a “Silicon Shield” around the country, perhaps keeping China from invading.
While Nvidia (NASDAQ:NVDA) has seen a lot of investor interest recently due to its graphic processor units (GPUs) being used for ChatGPT and other AI applications, Taiwan Semiconductor makes them. It also makes the chips found in Apple’s (NASDAQ:AAPL) iPhones.
TSM stock is down around 12% over the past year, but it has rallied 35% in the past six months. Over the past five years, shares have returned 115%, easily outpacing the 56% advance in the S&P 500. Yet, TSM’s current price-to-earnings (P/E) ratio of 13.9 suggests shares are undervalued at current levels.
Finally, the company pays a quarterly dividend of 46 cents a share for a yield of 2.1%.
Nvidia (NVDA)
With its chips being used to develop and train advanced AI models such as ChatGPT, Nvidia (NASDAQ:NVDA) is arguably the hottest semiconductor company right now, with shares up 94% so far this year. It is also one of the top semiconductor stocks for long-term gains, returning 375% over the past five years. The company is poised to play a key role in driving artificial intelligence applications forward, which should continue to drive upward momentum in shares.
Beyond AI, Nvidia’s chips are used in other areas of technology including video games and cloud computing. Nvidia’s semiconductors are so advanced that the world’s most powerful quantum computers run on them.
While the stock declined in 2022 due to weakening demand coming out of the pandemic and a backlog of graphics cards, those issues have been put in the rearview.
Morgan Stanley analyst Joseph Moore recently said NVDA stock was a buy ahead of the company’s upcoming earnings report, which is scheduled for May 24. “We see a positive setup for NVIDIA in this quarter’s earnings, with checks indicating that the significant enthusiasm we’ve seen from AI adopters has translated into reacceleration for data center (DC) product,” Moore said.
Moore’s target price of $304 implies upside of more than 7% for NVDA stock, but that’s likely just the beginning.
Intel (INTC)
Admittedly, Intel (NASDAQ:INTC) is a dark horse pick as the company and its stock are struggling right now. But we’re talking about the best semiconductor stocks for long-term investments, and INTC stock is so cheap right now that it fits the bill.
Arguably, there is no better time to buy Intel stock than right now after the company reported the biggest quarterly loss in its 55-year history. For the first quarter, Intel reported a 133% year-over-year drop in its earnings per share (EPS) while revenue fell 36% from a year earlier. Ouch!
Believe it or not, the record loss was not as bad as was feared on Wall Street. The consensus view of analysts who cover the company was for Intel to report a loss of 15 cents a share. Intel reported a 4-cent per-share loss, and INTC stock actually rose 4% the day after its Q1 print.
The current troubles at Intel stem from its ongoing efforts to restructure its factories as foundries that are capable of making microchips for other companies such as Nvidia and Apple. Intel has said that, by 2026, it hopes to manufacture chips as advanced as those made by Taiwan Semiconductor. Getting there isn’t going to be easy, but investors who buy INTC stock now might be rewarded over the long term.
Intel’s stock is down more than 30% over the past year and 43% over the past five years. While patient shareholders wait for a turnaround, they can enjoy a dividend of 12.5 cents per share, good for a yield of 1.7%.
On the date of publication, Joel Baglole held long positions in AAPL and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.