Semiconductor stocks sold off recently after Bloomberg came out with a report that the U.S. was looking to enact tighter export restrictions to keep China from gaining access to advanced chip technology. The report noted that the restrictions would extend to foreign semiconductor equipment manufacturers that use U.S. technology, such as ASML and Tokyo Electron, as well.
Investor worries only intensified as former President Donald Trump, who is seeking to return to office, said that Taiwan should pay for its own military defense. Taiwan manufactures over 90% of the world's advanced chips, according to the Semiconductor Industry Association, and China considers the autonomously governed island as its territory.
While these reports add risk to the space, they often tend to be noise more than anything else. With the boom in artificial intelligence (AI) chips, companies in the space have a long runway to grow without shipping advanced chips or equipment to China.
Let's look at three stocks to consider following this sell-off.
Image source: Getty Images.
1. Nvidia
As the biggest beneficiary of the AI boom to date, any sell-off in Nvidia (NASDAQ: NVDA) looks like a buying opportunity at this point. The company has seen its sales skyrocket over demand for its graphic processing units (GPUs), which are being used to build out the infrastructure that powers AI applications. Meanwhile, analyst channel checks and reports out of Taiwan indicate that demand for its newest chips based on its latest Blackwell architecture is insatiable, with the company looking to gain more production capacity from its contract manufacturers.
At this point, with Nvidia looking to push innovation and its Compute Unified Device Architecture (CUDA) software platform being the de facto software program that developers learn to program on, there appears little threat to its dominant market position in the GPU space. And if AI is still in its early days and the infrastructure buildout continues, then Nvidia still has a lot of growth in front of it.
Trading at a forward price-to-earnings (P/E) ratio of about 43 times based on 2024 estimates and only 32 times based on 2025 estimates, Nvidia's stock is inexpensive, given the growth in front of it and its long-term prospects. As such, this recent sell-off looks like a good buying opportunity.
NVDA PE Ratio (Forward) data by YCharts
2. Arm Holdings
While Nvidia is the king of GPUs, Arm Holdings (NASDAQ: ARM) is the leader in central processor units (CPUs), which act as the brain for computers when performing functions. Unlike Nvidia, it doesn't sell chips, but instead licenses its technology to other semiconductor companies that design their chips based on its architecture. It has also started a subscription service for customers to have broad access to its intellectual property called Arm Total Access.
This has helped lead the company to take a dominant share in the smartphone market, where nearly all smartphones are powered by chips using its technology. With the advent of AI, the company could be set to benefit from a nice smartphone upgrade cycle, as users scramble to upgrade their smartphones to be able to run the latest AI applications.
However, Arm also set its sights on other markets as well. The company is making a big push into the personal computer (PC) market, with a goal of being in 50% or more of new Windows-based PCs in the next five years. The company is also reportedly looking to set up an AI chip division to help majority owner SoftBank, which owns 90% of the company, built out its data center operations using its chips.
Trading at 99 times 2024 earnings estimates and 74 times 2025 earnings estimates, Arm stock is not cheap. However, its high-margin, licensed business model is extremely attractive, as the company is able to reap the benefits of its design wins for years on end. In fact, the company has boasted that almost half its royalty income comes from Arm products initially released between 1990 and 2012. As such, the recent pullback could be a good time to consider adding a position in the stock.
ARM PE Ratio (Forward) data by YCharts
3. Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing (NYSE: TSM), or TSMC for short, is the leading contract manufacturer for semiconductors in the world. While the issues surrounding Taiwan could have a direct impact on the company, given the importance of Taiwan, TSMC specifically, it is in the best interest of the U.S. and its allies to protect Taiwan in any conflict or else face a global catastrophic disruption in the supply of semiconductor chips.
Meanwhile, TSMC is a big beneficiary in the AI chip race, as it supports Nvidia and its competitors producing its chips. The company is building out its own capacity, as well as indicating that it could increase prices.
With demand currently outstripping supply, especially for its more advanced 3-nanometer and 5-nanometer technology, the company is positioned to ride the AI demand wave well into the future. At the same time, it is also pushing into 2-nanometer technology.
Trading at just over 26 times the 2024 earrings consensus and 20 times the 2025 consensus, TSMC looks attractively priced after the recent sell-off. As such, now looks like a good opportunity to buy the stock.
TSM PE Ratio (Forward) data by YCharts
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
