2 semiconductor stocks with excellent long-term potential that you should buy

Leading semiconductor businesses are benefiting from the favorable demand environment created by the artificial intelligence (AI) arms race. Since bottoming out in 2022, the PHLX semiconductor sector index has gained 122%, outperforming the technology-focused Nasdaq Composite’s 69% return.

The semiconductor business has been growing steadily since the 1980s, despite occasional dips in revenue. The leading vendors should have years of strong growth ahead of them due to the growing need for high-performance processors to power AI server build-outs.

Here are two top semiconductor stocks with superior return potential over the next decade.

1. Arm Holdings

Although not as well-known as Intel to some, Arm Holdings (NASDAQ: ARM ) is a major player in the semiconductor sector. It licenses CPU designs used in cloud servers, cellphones, supercomputers, and Windows PCs with ARM architectures.

It can provide high returns for shareholders and is a very successful corporation due to its income from royalties and licensing.

Arm’s Armv9 technology is now gaining a lot of traction due to its improved performance and energy efficiency. Its experience in creating affordable, efficient semiconductor technology will be useful for power-hungry data centers.

In the most recent quarter, royalty revenue grew 37% year-over-year, reflecting market share growth in the cloud computing industry. All the top cloud service providers, such as Google, Amazon, and Microsoft, are using Arm-based chips. Its integration with Nvidia‘s Grace CPU positions Arm as a leading supplier of AI applications in data centers.

AI-enabled PCs represent another area for expansion. As the PC industry moves away from Intel’s traditional x86 CPUs and towards ARM-based chips, ARM-based chips, which are common in 99% of smartphones worldwide, can enjoy comparable improvements.

For investors in Arm, the biggest risk is the high valuation of the stock, which looks expensive at a forward price-to-earnings ratio of 100 based on this year’s consensus earnings estimate. Arm is becoming the industry standard for CPU technology in all major computer sectors, so it’s still worth buying.

Long-term strong profit growth and returns to shareholders should be supported by its profitable business strategy, which is based on licensing and royalty revenues.

2. Micron Technology semiconductor

One of the top providers of non-volatile memory (NAND) and dynamic random-access memory (DRAM), which is used in many products but most often found in PCs and data centers, is Micron Technology (NASDAQ: MU ). This year, the stock has risen to unprecedented levels due to the increasing demand for high-performance memory modules on AI servers.

Demand and price fluctuations are common in the memory and storage sector. The primary reason for the semiconductor industry’s 8% revenue decline last year was a sharp decline in memory prices.

However, AI is helping Micron’s business out of the recession; In the most recent quarter, the company’s sales grew 58% year-over-year, and management expects more growth.

Most notably, a shortage of high-performance memory chips is helping Micron’s bottom line. The corporation posted a profit of $0.71 per share in the fiscal second quarter from a loss in the prior year. The positive price trend should support strong demand in the data center market, which will accelerate the company’s revenue growth.

Must be aware of the cyclical nature of the business; Still, according to current consensus estimates, earnings per share will come in at just $1.02 this fiscal year before rising to nearly $9 next year. The need for AI could drive revenue and profits to all-time highs, driving Micron’s share price higher for years to come.

Data center infrastructure costs are likely to increase significantly An excess of chips available to the data center industry, which puts pressure on memory sales prices. But Micron has another trick to fuel growth: The consumer PC market is booming again. Although the company has had a good start to the new year, it is still not operating at full capacity.

Should you invest $1,000 in Arm Holdings right now?

Consider the following before buying arm holding stocks:

The Motley Fool Stock Advisor expert team has determined the top ten stocks that investors should buy right now. And none of them involve arm holding. In the coming years, the ten equities that made the cut could reap huge gains.

Given that Nvidia created this list on April 15th, 2005, $1,000 would have earned you $775,568 at our suggestion!*

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Alphabet executive Susan Frey is on The Motley Fool’s board of directors. Motley Fool’s board of directors includes John McKee, former CEO of Amazon’s Whole Foods Market. John Ballard is employed by Nvidia. The Motley Fool advises and has stock in Nvidia, Microsoft, Amazon, Alphabet and Microsoft. Along with Intel, The Motley Fool suggests the following picks: a long call on Intel in January 2025 at $45; a long call to Microsoft in January 2026 at $395; a short call on Intel in August 2024 at $35; and a short call on Microsoft in January 2026 at $405.

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