The Best Semiconductor Stocks to Buy

Marvell Technology

• Market value: $38.0 billion
• Dividend yield: 0.4%

Everything seems to still be moving in the right direction at Marvell Technology (MRVL, $55.58), including the share price which is up about 50% in the past 10 months or so. Off the price charts, the company – which makes semiconductors for data storage, communications and consumer markets – is holding its own too.

Marvell reported better-than-expected results in the second quarter of fiscal 2024. The company had revenue of $1.34 billion, down 12% year-over-year but above the $1.32 billion reported in its fiscal first quarter. For the six months ended July 29, MRVL reported revenue of $2.66 billion.  

MRVL is not impervious to the headwinds facing the semi industry such as weakening demand in the consumer sector, but it was able to maintain growth in other end markets. This was particularly true in automotive/industrial, where the revenue rose 32% year-over-year. 

When looking at Marvell, or for that matter, most tech stocks, the earnings per share is not always the best measurement for success. A look at Marvell's statement of cash flows shows that stock-based compensation, depreciation and amortization of intangible assets totaled $500 million for the most recently reported quarter, a figure which dwarfs a reported net loss of $207 million. 

Also notable also is the company's commitment to research and development, spending nearly $475 million in the last quarter. Clearly, MRVL is looking to the future, though what the future looks like, beyond continued, if albeit lumpy expansion, remains difficult to discern.  

KLA

• Market value: $74.0 billion
• Dividend yield: 1.1%

The investment thesis for KLA (KLA, $544.54) which offers semiconductor manufacturing solutions, is simple: fundamentals and industry outlook. And it's one that remains intact following the company's fiscal first-quarter earnings report.

Revenue of $2.4 billion and GAAP earnings of $5.41 per share came in at the upper end of KLA's guidance range.

The company sports a decent balance sheet with good liquidity, and operating cash flow exceeded $3.54 billion on a 12-month basis in its fiscal first quarter. KLA's free cash flow (cash from operations less capital expenditures) arrived at $815.7 million on a quarterly basis.   

These solid fundamentals have helped KLAC shares outperform their fellow semiconductor stocks in recent months. Shares are up 46% in the past 12 months (more if you include the 1.1% dividend), versus the iShares Semiconductor ETF (SOXX), which is up 39%. 

This is not an entirely logical constellation, however. Semiconductor supply companies face a big concentration as there are a limited number of customers big enough to service the foundries and related companies. So, when one or all of these customers face troubles, it can spell trouble for KLA too. 

Notwithstanding, a sure sign of management confidence – or hubris – is KLA's use of cash, the largest expenditure of which were for the company's stock buybacks and payments of dividends to shareholders, at 78% of free cash flow. All in, KLA returned a total of $636.9 million to shareholders in the three months ending September 30. For a company with a market cap of around $74 billion, this is a big number.  

And behind financial strength and earnings momentum is increasing demand for semiconductors worldwide in the form of a one-two punch. In addition to governments mobilizing to increase production as a means of weaning their economies from reliance on South Korean and Taiwanese chip giants Samsung and Taiwan Semiconductor (TSM), the digitization of daily life is putting chips in everything from doorbells to automotive systems. 

All of this makes KLAC one of the best semiconductor stocks going forward. 

Nvidia

• Market value: $1.21 trillion
• Dividend yield: 0.03%

Nvidia (NVDA, $492.98) stock bottomed near the $100 per-share price in October 2022, after the U.S. government initiated new restrictions on chip exports to China. NVDA has since found its footing thanks to buzz surrounding artificial intelligence (AI) and has quadrupled since then.

For its fiscal 2024 second-quarter report, Nvidia handily beat analysts' revenue  and earnings per share estimates. Its revenue doubled year-over-year, and was up 88% from the previous quarter.  

The company's automotive division reported a 15% year-on-year decline in sales in its Q2 report. Its data center division remains strong, however, thanks to AI, with revenue of $10.3 billion, up 171% from the year-ago figure – a silver lining for investors since data center represents 76% of NVDA's second-quarter revenue by end market. Gaming, on the other hand, represents only 2%.   

And while many chip companies have been hammered by the U.S. export controls that affected demand from Chinese companies, Nvidia says it does not believe the restrictions will have any meaningful impact on its near-term financial results.

Nvidia has solid fundamentals and not only does it remain one of the best semiconductor stocks, but it arguably remains the best AI stock among its peers.

Kulicke and Soffa Industries

• Market value: $2.9 billion
• Dividend yield: 1.5%

Kulicke and Soffa Industries (KLIC, $50.65), which provides semiconductor manufacturing equipment and services, had stellar 2021 results. These comparisons have made more recent results look not quite as good. 

In its fiscal fourth-quarter report ended September 30, the company reported 29% and 64% year-over-year decreases in revenue and net income, respectively. Adding to the pain, earnings per share were down 63%. 

The stock has also lost the favor of several analysts, suffering from earnings estimate cuts. This, combined with a bearish landscape, has made for tough sledding in KLIC shares, which shed nearly 32% from August 1 to October 25. But the stock is up about 24% since then.

Kulicke and Soffa faces a concentration risk where relatively few customers can disproportionately impact earnings, and if you sell to semiconductor manufacturers and related companies, there's not that many customers to be had. In 2021 and 2022, KLIC had customers who accounted for approximately 17% of sales in each year.   

Still, the company's fiscal second-quarter guidance suggests that management is expecting "moderate demand improvement" in the second quarter and a stronger fiscal 2024 recovery, says Needham analyst Charles Shi (Hold).

To broaden its product portfolio and strengthen its capabilities, KLIC in early 2023 acquired high-precision micro dispensing equipment manufacturer, Advanced Jet Automation. The acquisition will allow Kulicke and Soffa to tap into the $2 billion dispensing equipment market and could be a long-term growth driver.   

KLIC is a solid choice among semiconductor stocks for income investors too. It is yielding about 1.5%, and the company has averaged annual dividend growth of roughly 30% since 2018, when it was instituted. 

SiTime

• Market value: $2.7 billion
• Dividend yield: N/A

SiTime (SITM, $113.67) makes silicon-based timing products for use in electronic equipment, from mobile phones to graphics and identity cards. Timing is critical to the functioning of digital processing, and the more environments silicon-based – as opposed to quartz – timing devices can be used, the more areas advanced processing can be deployed. Timing, as they say, is everything.

The company estimates there are one to two timing chips per device today, creating a market for 40 billion units. But this will grow to 125 billion units in 2030 as silicon-based timing applications proliferate and as consumers and industries own more connected devices.

SITM demonstrated significant momentum during 2021, with revenue doubling from $36 million in the first quarter of the year to $76 million in the fourth quarter. Although revenue declined in 2022, it has stabilized this year. SiTime, for instance, recently reported third-quarter revenue of $35.5 million, up 28.1% quarter-over-quarter.

"[W]e remain encouraged by the quarter-over-quarter sequential growth that SITM exhibited in the third quarter (and anticipated in the fourth quarter), leaving us cautiously optimistic that the company has moved beyond the near-term trough," says Stifel analyst Tore Svanberg (Buy).

When assuring investors, SITM notes design wins, its leadership position, and quote activity, which are important. But better pricing and more repeat business, both of which SiTime is positioned to realize, may be what moves the needle on sales and earnings.   

SITM is a small-cap stock, and small companies can get buffeted by circumstances well beyond their control. And while this may well be the case with SiTime, for believers in semis, the timing market, and SiTime's place in it, SITM is one of the best semiconductor stocks out there. 

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