Semiconductor companies are those involved in the design, manufacturing, and distribution of semiconductor devices and related technology.

Semiconductors — or microchips — are essential to the functioning of electronic devices and have seen particular investor interest in 2023 given the rise of the AI sector. Without semiconductors, there would be no computers, smartphones, gaming, or a hundred other applications, all of which are essential to 21st century living.

OpenAI’s revolutionary ChatGPT chatbot, the growing political importance of AI development, and Nvidia’s dizzying rally are all testament to the importance of the sector. With significant growth in AI interest expected through the next decade and beyond, investing in semiconductor stocks within a diversified portfolio could be an attractive proposition.

For context, giants including Intel and ASML consider that annual global spending on semiconductors will rise to $1 trillion by 2030, up from just $570 billion in 2022. It’s also worth noting that China and the US are both attempting to harm each other’s ability to use advanced semiconductors to develop AI technology; the US through export bans of certain semiconductors and China through export bans of certain critical minerals.

Best semiconductor stocks to watch

Before delving into some of the most popular individual semiconductor shares, it’s worth highlighting that there are many popular, diversified ETFs which offer exposure into multiple companies on a low cost basis.

For example, the Vaneck Vectors Semiconductor UCITS ETF holds 25 of the world’s largest semiconductor companies and is a common choice for investors who want broad exposure to the sector without the need to conduct additional research.

In terms of individual shares, the five stocks listed below are widely considered to be the largest AI companies in the world by market capitalisation right now. However, analysts disagree on what exactly constitutes a semiconductor stock, and further, these may not be the best value opportunities.

1. Nvidia
2. Taiwan Semiconductor Manufacturing Company
3. Broadcom
4. Samsung
5. ASML

Nvidia

Nvidia shares have been on a dizzying rally to a $1.77 trillion valuation, rising by 1,720% over the past five years. This is more than the entire Chinese stock market.

The microchip behemoth was arguably the most popular semiconductor stock of 2023 — though of course, popularity does not mean it is the best investment available.

Q3 results were remarkable; revenue came in at $18.12 billion compared to the LSEG analyst consensus of $16.18 billion, a rise of 206% year-over-year. The al-important data-centre revenue rose by a whopping 279% to $15.51 billion — with half of this cash coming from cloud infrastructure providers including Amazon.

And Nvidia also expects to generate 231% revenue growth in Q4 — equivalent to $20 billion. On the other hand, it has a huge price-to-earnings ratio, alongside significant exposure to a faltering Chinese economy and rising Sino-US export tensions.

Q4 results are expected on 21 February.

Taiwan Semiconductor Manufacturing Company

While Nvidia is touted as the ‘picks and shovels’ semiconductor stock for 2023, this crown could arguably belong to Taiwan Semiconductor Manufacturing Company. Most chip producers — including Nvidia — outsource actual production to the Taiwanese company, with the country responsible for making circa 90% of the world’s most advanced chips.

TSMC shares have did well in 2023, and have continued to rise in 2024, given the AI-driven demand, its colossal manufacturing capacity and the wide economic moat surrounding starting up any sizeable competitor.

However, Taiwan’s complex political status, including its relationship with China remains a long-term risk. The company recently announced plans to build a second semiconductor manufacturing plant in Japan.

Broadcom

Broadcom may not be the most fashionable name in the semiconductor world, but the company’s designs and manufacturing acumen underpins masses of data centre, networking, software, broadband, wireless, storage, and industrial markets.

The company’s 2023 fiscal year served up many highlights: revenue grew by grew 8% year-over-year to a record $35.8 billion, driven by investments in accelerators and network connectivity for AI by hyperscalers.

President and CEO Hock Tan enthused that ‘the acquisition of VMware is transformational. In fiscal year 2024 we expect semiconductor to sustain its mid to high single digit revenue growth rate, with the contribution of VMware driving consolidated revenue to $50 billion, and adjusted EBITDA to $30 billion.’ And the company delivered a record adjusted EBITDA margin of 85%, delivering $17.6 billion in free cash flow.

Broadcom shares now up by 115% over the past year.

Samsung

Samsung is a South Korean titan that is well-known as one of the world’s largest producers of electronic devices — ranging from appliances to digital media devices, semiconductors, memory chips, and integrated systems.

In recent fiscal 2023 results, it reported KRW 258.94 trillion in annual revenue and KRW 6.57 trillion in operating profit — and in the current quarter is focusing on improving profitability by increasing sales of high value-added products. The company further indicated that the second half of this fiscal year should show ‘more significant improvement.’

Samsung also signed a supply deal with Nvidia in September, and further collaboration remains a key opportunity in the new year.

ASML

ASML is a world leader in chip-making equipment. It’s a common misconception that the company actually makes semiconductors; it does not. It designs and manufactures the lithography machines that are an essential component in microchip manufacture and is therefore indispensable within the wider supply chain.

You could argue that ASML is an even more crucial to the manufacturing line than TSMC, but the stock has only risen by a comparatively small 43% over the past year.

In 2023 full-year results, the semiconductor stock delivered €27.6 billion in net sales, on a gross margin of 51.3% Accordingly, it delivered a significant €19.91 of earnings per share.