Table of Contents
After a strong run in the first half of the year, technology stocks have come under pressure recently. Recent trends in stock prices indicate that investors are taking a more cautious stance on the economy as the mania continues artificial intelligence (AI) has also been relaxed. Even high flying Nvidia has been hit, with share trading down almost 20% in the past six months.
But this recent sell-off also presents some opportunities.
Let’s take a look at three tech stocks (not named Nvidia) that investors should consider buying amid this latest market adjustment.
1. Semiconductor manufacturing in Taiwan
Taiwanese semiconductor manufacturing (NYSE: TSM)or TSMC for short, is the largest semiconductor manufacturer in the world. Many today semiconductor companies do not produce our own chips. Instead, they outsource the process to companies that specialize in chip production.
While outsourcing manufacturing may not sound like an exciting venture, don’t be fooled: this is a very complex process led by the companies that do it best. In fact, the contract manufacturing unit of Intelwhich was created in 2021 to compete with TSMC, recently suffered a major setback after chip designer Broadcom The tests conducted showed that Intel’s latest process was not ready for high-volume production.
At the same time, TSMC is at the forefront of technological innovations, with the company set to introduce 2-nanometer production technology next year. The smaller the chip density, the better the performance and consumption power. As the demand for AI chips becomes insatiable, the company has increased its capacity and built new production facilities.
Given the high demand for its services, TSMC will also increase prices for its more advanced technologies. Morgan Stanley Analysts estimate that prices will rise 10% this year for AI semiconductors and chip-on-wafer-on-substrate (CoWoS), 6% for high-performance computing and 3% for smartphones.
The stock is trading at a price-to-earnings ratio of around 19 based on next year’s analyst estimates and is still attractively valued, especially given the growth prospects ahead.
2. ASML
While TSMC makes the chips for semiconductor companies, ASML (NASDAQ: ASML) makes the highly specialized equipment used by companies like TSMC to manufacture these chips. As TSMC and others expand production to meet increasing demand for AI chips, they will need more equipment to produce those chips.
Not surprisingly, production of semiconductor equipment can be quite bumpy, as these are very expensive devices. These machines have a typical life cycle of approximately seven years before requiring replacement or overhaul.
Meanwhile, 2024 is a bit of a transition year for ASML as it introduces its latest technology: extreme ultraviolet lithography system with high numerical aperture, or high NA EUV. The company says the new machines will increase chip production productivity while reducing production costs and improving chip functionality.
The company has shipped two of its high NA EUV systems to date, one of which includes qualifying wafers. At a price tag of $380 million per unit, these new systems are pricey and should help boost revenues for ASML next year and beyond as chip makers turn to the latest technology to meet demand for AI chips. That, combined with the number of new factories that will come online in the coming years, bodes well for ASML’s long-term prospects.
At an earlier analyst day, ASML management set targets to grow revenue to between 30 billion and 40 billion euros ($33.3 billion to $44.4 billion) by 2025 and to 44 billion to 60 billion ($48.8 billion) to $66.6 billion) by 2030. The company produced sales of 27.6 billion euros ($30.6 billion) last year, and this year the company expects similar sales.
Trading at a forward price-to-earnings ratio of just over 24 times based on analyst estimates for 2025, ASML shares look attractive given the growth bend ahead.
3. Gun ownership
Arm positions (NASDAQ:ARM) is the leading semiconductor company for central processing units (CPUs), often described as the brains for devices. The company has a dominant position in the smartphone market, with its technology in virtually all smartphones around the world.
Meanwhile, Arm is also focusing on the PC market. The company’s technology is in everything right now Apple computers and laptops, but the goal now is to be in 50% of Windows PCs in the next five years. Although the market is not as big as smartphones, this is still a great opportunity for the company. Arm has also made solid progress in the automotive market. It reported 28% year-on-year sales growth in the sector in the second quarter.
Arm also benefits from AI. Last quarter, Arm noted that it saw an increase in licensing in the AI data center due to the need for customization, as it collaborated on a superchip with Nvidia that combines an Arm-based CPU with an Nvidia graphics processing unit (GPU). The technology also forms the basis for CPU data center chips Amazon And Alphabet.
While semiconductor companies like Nvidia and Broadcom design their own chips, Arm adopts a different model where it licenses its technology to other companies so they can design their own chips based on their technology. Through its licensing, it collects royalties on the number of chips shipped that incorporate its technology. This income stream can last for years or even decades.
More recently, the company has transitioned customers to a subscription model, where they can get a broader range of uses for its intellectual property. Whether through royalties or subscriptions, Arm has a largely recurring revenue stream with a very high margin.
Based on 2025 analyst estimates, Arm stock trades at a price-to-earnings ratio of just over 60.5 times. While that isn’t cheap at first glance, it is lower than at higher levels, and Arm has one of the most attractive long-term business models in semiconductors.
Should You Invest $1,000 in Arm Holdings Now?
Consider the following before purchasing shares in Arm Holdings:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Arm Holdings wasn’t one of them. The ten stocks that made the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $630,099!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns September 3, 2024
Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Geoffrey Seiler has positions in Alphabet. The Motley Fool holds positions in and recommends ASML, Alphabet, Amazon, Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has one disclosure policy.
Three stocks outside of Nvidia to buy during the tech sell-off was originally published by The Motley Fool