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3 Top Chip Stocks to Buy in 2018

Harsh Chauhan, The Motley Fool

The semiconductor industry was on a roll last year thanks to rising demand for chips across industries such as smartphones, the Internet of Things, and data centers. Not surprisingly, the PHLX Semiconductor Sector index, which tracks the performance of major names in this space, shot up almost 40% in 2017.

And demand for chips is expected to keep rising this year. So, it won't be surprising if Micron Technology (NASDAQ: MU), NVIDIA (NASDAQ: NVDA), and Skyworks Solutions (NASDAQ: SWKS) deliver more upside in 2018.

A chip inside an integrated circuit.

Image Source: Getty Images.

Micron Technology

Micron Technology makes dynamic random access memory (DRAM) and NAND memory chips that are used in smartphones, PCs, automotive, and other applications. The chipmaker has enjoyed impressive gains over the past year, as the prices of NAND and DRAM memory have shot up  because of rapidly growing demand and weak supply growth.

Fortunately for Micron, the trend of strong memory pricing is set to continue in 2018 because of strong demand. IHS Markit forecasts that DRAM sales could hit $85 billion this year, a jump of almost 17% from 2017. Additionally, NAND flash memory sales could rise 10% to $59.2 billion.

Micron gets 67% of its revenue from the DRAM segment, while NAND flash accounts for 27% of its total sales.

Industry watchers expect DRAM supply to remain tight throughout the year. Any potential increase in supply will go toward meeting newly created demand from data center expansion and higher DRAM content in smartphones, giving Micron's bottom line a solid boost.

Analyst estimates compiled by Yahoo! Finance forecast that Micron's earnings per share in fiscal 2018 could increase to $9.74, from $4.96 in the preceding year. But what's more important to note is that its earnings could grow at 27% a year for the next five years, making Micron a top semiconductor pick considering that it trades at a price-to-earnings (P/E) ratio of just 7.

NVIDIA

NVIDIA was a big winner in 2017. Shares of the graphics specialist rose more than 80% in 2017 as it consolidated its lead in the burgeoning GPU (graphics processing market). It currently commands almost 73% of the GPU space, which bodes well for the long run given the massive expansion expected in this market.

According to Allied Market Research, the global GPU market will grow at a compound annual growth rate (CAGR) of 35.6% through 2022 thanks to their application in areas such as artificial intelligence (AI) and augmented reality (AR). So, NVIDIA could win big from the rapidly growing GPU market provided it can defend its position.

The good news for NVIDIA investors is that it looks well-placed to defend its GPU superiority against closest rival AMD. Last year, AMD had launched its latest Vega GPUs with a lot of fanfare, but they failed to pass muster against NVIDIA's offerings. More importantly, NVIDIA is making moves to further bolster its position in the GPU space with its new launches.

The company recently launched its Titan V desktop graphics card based on the Volta architecture for artificial intelligence applications. This $3,000-priced GPU isn't meant for hardcore video gaming purposes even though NVIDIA calls it a consumer GPU. The card is intended for scientists and researchers to train AI models even faster, though it does give a glimpse of how the mainstream cards based on this architecture could perform.

NVIDIA claims that the Titan V is nine times faster than its predecessor, Titan Xp, which is based on the Pascal architecture. So, the company can increase its GPU lead over AMD when it launches consumer-centric versions of cards based on Volta. In all, the success of NVIDIA's current and upcoming graphics cards for gaming and AI applications should lead to robust top- and bottom-line growth not just in 2018, but also in the long run.

NVIDIA, however, is the most expensive of the three stocks discussed here, by a wide margin. Its trailing P/E ratio of 54.6 easily eclipses the 26.1 industry average. Moreover, NVIDIA isn't cheaper on a forward P/E basis either, with a ratio of 43.3. 

But what makes NVIDIA a good bet despite a steep valuation is that it isn't dependent on a few select customers (as in the case of Skyworks) or pricing cycles (the case at Micron) for growth. As already mentioned, NVIDIA has a strong command in GPUs that it is unlikely to yield, and this is allowing it to tap the growing application of these chips in fast-growing markets such as data centers and automotive.

NVIDIA deserves the premium it carries because it is the leader in a rapidly growing GPU market. 

Skyworks Solutions

Skyworks Solutions makes chips that enable connectivity across a wide range of applications, including smartphones, connected cars, and the Internet of Things. Its notable customers include smartphone giants such as Apple (accounting for 40% of the total revenue), Samsung, and popular Chinese smartphone maker Huawei.

The company has recently started making waves in the Internet of Things space, with its non-mobile revenue increasing 22% year over year last quarter to $256 million. This impressive growth was a result of Skyworks' growing traction in lucrative and fast-growing end markets such as smart speakers, smart homes, smartwatches, and automotive.

Skyworks, for instance, is supplying chips for Fitbit's new watches, and has recently scored wins at drone market leader DJI. Additionally, it is supporting smart-home systems from Bosch and Cisco, targeting markets such as smart lighting and home security.

These efforts should help Skyworks increase its non-mobile revenue. On the other hand, its partnerships with the smartphone companies mentioned above will boost its core mobile business, which supplies 64% of the total revenue.

Huawei, for example, is using $9 worth of Skyworks' chips in each of its Mate 10 smartphone. This is great news for the chipmaker as Huawei is looking to enter the U.S. smartphone market this year.

So, Skyworks enjoys a host of catalysts across several industries. More importantly, investors can get into this stock at a cheap valuation. Skyworks has a trailing P/E ratio of 18.5, well below the 25.9 industry average. A forward P/E ratio of 13.7 indicates that analysts are expecting a bump in its bottom line in the future, making it a good choice for investors looking for growth at a reasonable price.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Fitbit, Nvidia, and Skyworks Solutions. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and short January 2018 $105 calls on Skyworks Solutions. The Motley Fool recommends Cisco Systems. The Motley Fool has a disclosure policy.