Market Health

Is Now a Good Time to Invest in Semiconductor Chip Stocks?

Semiconductor chips are found in nearly everything these days.

Smartphones are smarter than ever. And 40% of the cost of a new car comes from its electronic systems.

But chips have been in short supply since the middle of last year. It’s just one more thing that has been disrupted by the pandemic.

So is now a good time to invest in semiconductor chip stocks?

Outsourced Supply

Back in the 1970s, when I was an engineer working in the chip industry, the U.S. made more chips than any other country.

But that’s not the case today.

In 1990, 37% of chips sold worldwide were made here. And in 2019, that number dropped to just 12%.

Companies trying to save money gradually shifted chip manufacturing to offshore foundries. Some are located in Thailand and Singapore, but most are in China.

So much innovation is born in the U.S. But it’s scary that most of the leading-edge chips aren’t made in the U.S.

Designing chips is one thing. U.S. companies are great at that. But they depend on foreign companies to make them. And that can quickly go south.

For example, what if China were to decide to stop selling them to the U.S. or drastically increase prices?

That would devastate the U.S. economy.

But help is on the way for the chip industry. The current administration has a plan to bolster it through the Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act.

This was recently passed as part of the National Defense Authorization Act, and it will funnel $52 billion to the American chip industry over the next five years.

Should You Invest?

So is investing in chip companies today worthwhile?

The short answer is yes, but some companies are better than others.

Companies designing chips for leading-edge technologies, like 5G, artificial intelligence (AI) and advanced medical applications, are all good bets.

Long-term trends use the most advanced chips being designed today. And the companies that design them should do better over time.

Intel (Nasdaq: INTC) is an American chipmaker. It’s one of the few U.S. companies that both designs and makes its chips.

Its products are widely used in many of today’s computers and servers. And its designs include some of the world’s most advanced computer processors.

In one of Intel’s recent press releases, it forecast that global spending on chips will reach $1 trillion annually by the end of the decade. That’s twice what it is today.

Nvidia (Nasdaq: NVDA) is another one of my favorite chipmakers. It designs the most advanced graphics processing units.

These are used in gaming, AI, data centers, autonomous driving and other high-end computing applications. And its technology is one or two years ahead of the competition’s.

These are just two examples of great chip companies to invest in. The demand for chips, as Intel predicts, is going to just keep increasing.

So every investor should have a few leading chipmakers in their portfolio. It’s a long-term bet on growing technology and innovation.

Good investing,

Dave

P.S. The Federal Reserve’s two-day policy meeting is ending today. To see how we think you should play its decision, click here.

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