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4 Top Stocks in Semiconductors

Semiconductors form the bedrock of the tech sector. Without new chips, data centers couldn't run, cloud services would fail, and the development of consumer electronics would stall out. That's why the Philadelphia Semiconductor Index, the main benchmark of the growing industry, has more than doubled over the past three years.

However, it can be tough for investors to identify decent semiconductor investments beyond market leaders like Intel and NVIDIA. So today, let's highlight four other top semiconductor stocks that could deliver big returns.

Chips being manufactured.
Chips being manufactured.

Image source: Getty Images.

Cypress Semiconductor

Cypress Semiconductor (NASDAQ: CY) is the market leader in wireless Internet of Things (IoT) chips, NOR and SRAM memory chips, USB-C controllers, and auto instrument cluster microcontrollers. Cypress generates most of its revenue from the automotive and industrial IoT markets, and its "Cypress 3.0" strategy aims to make the chipmaker a one-stop shop for various IoT needs.

The company has three core strengths. First, it dominates niche markets that are largely overlooked by bigger chipmakers. Second, it sells its chips in bundles, which locks in customers and helps it gain content share in cars and industrial machines. Lastly, rising sales of connected cars and the automation of factories should buoy its sales over the long term.

Wall Street expects Cypress' revenue to rise 7% this year as its earnings climb 39%. The stock trades at less than 14x forward earnings and pays a forward yield of 2.7%. Those numbers look solid, but the stock remains weighed down by near-term concerns about China and peaking auto sales.

Texas Instruments

Texas Instruments (NASDAQ: TXN) sells a wide variety of analog and embedded chips for automakers, industrial IoT machinery, and consumer electronics. Over the past few years, the company shifted its production from 200mm to 300mm wafers, which cut its average production costs by about 40%. That's how Texas Instruments continually expanded its margins as many other chipmakers struggled.

The company has two main strengths. First, its focus on low-end analog and embedded chips keeps its margins high, as the company can avoid direct competition with bigger chipmakers. Second, it's so well diversified that it can easily offset slowdowns in one market (like consumer electronics) with growth in other markets (like connected cars and industrial machines).

Analysts expect Texas Instruments' revenue and earnings to rise 7% and 26%, respectively, in 2018. Its stock trades at a reasonable 20x forward earnings, and it pays a forward yield of 2.2%. Shareholders have enjoyed annual payout increases for 14 straight years, which reduced its share count by a whopping 43% during that period.

A worker uses a laptop to control an automated factory.
A worker uses a laptop to control an automated factory.

Image source: Getty Images.

AMD

AMD (NASDAQ: AMD) is the second largest manufacturer of x86 CPUs and discrete GPUs in the world. It trails Intel and NVIDIA in those markets, respectively, but its chips are still popular with budget OEMs and consumers. AMD also merges its CPU and GPU technologies in single APU chipsets -- which power the PS4, Xbox One, and various gaming laptops.

AMD's EESC (Enterprise, Embedded, and Semi-Custom) unit, which supplies APUs to console makers, often supports its core business if its CPU and GPU sales waver. Instead of staying in the low-end market, AMD is challenging Intel and NVIDIA with higher-end chips. Its Ryzen chips are already claiming market share from Intel in desktops, while its new Vega chips won back some market share from NVIDIA during the first quarter, according to research firm JPR.

Many tech analysts seem unsure if AMD can keep landing body blows against its larger, more well-heeled rivals. Nonetheless, they still expect revenue to rise 26% this year as its earnings nearly triple. Those are stellar growth rates, even for a stock that trades at about 35x earnings.

Xilinx

Back in the 1980s, Xilinx (NASDAQ: XLNX) invented a new class of programmable chipsets called FPGAs (field-programmable gate arrays), which could be reprogrammed after being shipped. Today, Xilinx is the world's top maker of FPGAs, which are used across a wide range of industries. Its only meaningful competitor is Intel, which acquired Xilinx's top competitor Altera in 2015.

Xilinx generates its revenue from three core markets -- Communications and Data Center customers; Industrial, Aerospace and Defense customers; and Broadcast, Consumer and Automotive customers. Xilinx's Communications and Data Center market was its weakest one last quarter, but that softness was offset by the double-digit sales growth from the other two segments. Many of its newer chips are used for AI and machine learning tasks.

Wall Street expects Xilinx's revenue to rise 8% this year, and for its earnings -- which dipped on higher expenses last year -- to grow 38%. Xilinx trades at 24x earnings and pays a forward dividend yield of 2.1%. Investors shouldn't buy a stock based on buyout buzz alone, but Xilinx has often been cited as a takeover target following Intel's takeover of Altera.

More From The Motley Fool

Leo Sun owns shares of Cypress Semiconductor. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.

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