Semiconductors power many devices and appliances that we use every day. They form the bedrock for smartphones, computers, cars, refrigerators, and other essentials. Semiconductors have also been a reliable industry for investors seeking high returns. Many of the top corporations in the stock market are semiconductor firms or rely on the industry to generate higher revenue growth.
If you want to see how well semiconductor stocks have performed over the years, the iShares Semiconductor ETF (NASDAQ:SOXX) is a good place to start. It’s up by 31% year-to-date and soared by 267% over the past five years. Those returns comfortably beat popular indices like the S&P 500 and the Nasdaq Composite.
Buying individual semiconductor stocks can generate even higher returns than SOXX if you pick the right companies. Investors should look for firms with competitive advantages, rising revenue, and high profit margins. If you only have $500 to invest in semiconductor stocks, you may want to monitor these three stocks.
Taiwan Semiconductor (TSM)
Taiwan Semiconductor (NYSE:TSM) is making more investments in artificial intelligence. The company is opening a new chip packaging plant, allowing it to produce more AI chips. Investors got excited about the news and continued to buy shares. Taiwan Semiconductor is up by 65% year-to-date and gained 328% over the past five years. It also offers a 1.4% dividend yield and trades at a price-to-earnings ratio of 34x.
The chipmaker reported 16.5% year-over-year revenue growth in the first quarter. Net income increased by 9% year-over-year, resulting in a 38.1% net profit margin. Taiwan Semiconductor anticipates Q2 revenue will range from $19.6 billion to $20.4 billion. The midpoint of $20 billion represents a 27.6% growth rate from Q2 2023 revenue of $15.68 billion.
The company’s upbeat guidance has attracted several fans on Wall Street. The stock is currently rated as a “strong buy” with a projected 6% upside. The highest price target of $200 per share implies that TSM stock can gain an additional 19%.
Micron Technology (MU)
Micron Technology (NASDAQ:MU) is another semiconductor stock that has comfortably outperformed the stock market. Shares are up by 69% year-to-date and have gained 260% over the past five years. The $154 billion corporation currently has a 0.3% yield.
The chipmaker has been around for more than 45 years and benefits from AI tailwinds. Micron Technology reported 57.7% year-over-year revenue growth in for its fiscal second quarter. Net income more than doubled from a year ago to reach $793 million. Micron Technology closed out the quarter with a 13.6% net profit margin.
President and CEO Sanjay Mehrotra said Micron is “one of the biggest beneficiaries in the semiconductor industry of the multi-year opportunity enabled by AI.” Micron anticipates bringing in $6.6 billion in Q3 FY24 revenue, up from $3.75 billion a year ago, so guidance suggests a 76% year-over-year increase. Micron is rated as a “strong buy” with a projected 10% upside.
Lam Research (LRCX)
Lam Research (NASDAQ:LRCX) continues the trend of market outperformance with a 37% year-to-date gain and a 445% gain over the past five years. The company’s wafer fabrication equipment is necessary for the chipmaking process. Wafers act as a chip’s foundation, and Lam Research’s equipment allows customers to build smaller, more effective devices.
The company stands to benefit from AI tailwinds and the general demand for semiconductors. After a few quarters of declining revenue due to temporary headwinds, Lam Research is starting to flip the script. The company reported 0.9% quarter-over-quarter revenue growth in the first quarter, which reached $3.79 billion. Net income was $965.8 million, resulting in a 25.5% net profit margin.
Lam Research generates most of its revenue from Asia. China made up 42% of total revenue, Korea generated 24% of the company’s total business, and Japan and Taiwan each attributed to 9% of total sales. Wall Street analysts have rated the stock as a ” moderate buy.” The highest price target of $1,325 per share suggests a 29% upside.
On the date of publication, Marc Guberti did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.