Last month, I wrote a piece on the three best chip stocks with growth potential for long-term investors. In it, I noted the importance of semiconductors in all aspects of our lives, as well as their role in creating new, more powerful technologies in areas such as cloud computing and artificial intelligence (AI).
Despite the crucial role they play, chip companies were battered and bruised in 2022. The iShares Semiconductor ETF (NASDAQ:SOXX) plunged 35% last year. The reasons for the sharp sell-off in chip companies included weakness in consumer electronic sales following a pandemic-related surge and new restrictions on chip exports to China. This led to some less-than-stellar earnings reports and guidance.
However, chip stocks are once again on the rebound, with SOXX up 18% year to date. The renewed interest in chip stocks is being driven in part by the return of the risk-on trade, but also by better-than-expected earnings reports from some of the best chip stocks to buy now.
Here are three that crushed earnings and are just getting started.
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Nvidia (NASDAQ:NVDA) is the one name on this list of best chip stocks to buy now that has yet to report this earnings season. The maker of advanced chips that are used in AI applications, video games and cloud computing is scheduled to announce first-quarter results on May 24.
On Feb. 22, Nvidia reported better-than-expected Q4 2022 results, causing the stock to pop more than 14% in a single day. This strength was driven by growth in Nvidia’s data center business, which includes AI chips. Revenue for the segment was up 11% from a year ago to $3.62 billion.
Q4 adjusted earnings per share (EPS) of 88 cents compared with a consensus estimate of 81 cents. Revenue of $6.05 billion came in slightly ahead of expectations of $6 billion. While both revenue and net income were down on a year-over-year basis, investors seemed cheered by the company’s first-quarter sales guidance of $6.5 billion, which came in above expectations of $6.33 billion, as well as Nvidia’s bullish outlook on AI.
“AI adoption is at an inflection point,” Chief Executive Officer (CEO) Jensen Huang said on the earnings conference call. “OpenAI’s ChatGPT has captured interest worldwide, allowing people to experience AI firsthand, showing what’s possible with generative AI.”
NVDA stock is up 97% so far this year but could continue to rally based on its central role in powering AI and other cutting-edge technologies. A number of analysts increased their price targets for the stock following Nvidia’s Q4 earnings beat. While their median price target of $300 is less than 5% above the current share price, another earning beat later this month could spur a rally and a fresh round of analyst upgrades.
Advanced Micro Devices (AMD)
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On May 2, Advanced Micro Devices (NASDAQ:AMD) reported first-quarter earnings that beat the consensus estimate on the top and bottom lines. Adjusted earnings of 60 cents per share were 4 cents better than expected. Meanwhile, revenue of $5.35 billion beat by $50 million despite being down 9% from a year ago.
Yet, the stock sold off following the report, dropping 9% in a single day. Investors seemed displeased with management’s sales guidance for the second quarter. It expects to generate $5.3 billion in revenue versus the $5.48 billion Wall Street had penciled in.
Weakness in the PC sector has weighed on AMD’s results. However, CEO Lisa Su said the company expects “growth in the second half of the year as the PC and server markets strengthen.”
The post-earnings slump in AMD shares didn’t last long. On May 4, the stock rallied following news the company is reportedly joining forces with Microsoft (NASDAQ:MSFT) to develop new AI chips to better compete with Nvidia in the space.
While the companies declined to comment on the report, an AI push could be a boon to AMD’s future earnings, making it less reliant on the PC and server markets. It could also continue to propel shares, which are up 48% year to date, higher.
Taiwan Semiconductor Manufacturing (TSM)
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Taiwan Semiconductor Manufacturing (NYSE:TSM), or TSMC as it is popularly known, reported better-than-expected Q1 net income of $6.8 billion on April 20. Management said it expected the PC market to improve in the second half of the year and that it remained committed to spending up to $36 billion on upgrades to expand its capacity this year. The stock closed 2.4% higher on the day.
TSMC is a major supplier to Nvidia, Advanced Micro Devices and Apple (NASDAQ:AAPL), manufacturing some of the world’s most advanced chips. Management expects demand to pick up in the latter half of 2022 as more companies begin to utilize artificial intelligence.
The company is building a new $40 billion foundry operation in Arizona. This should help it meet rising demand for chips.
Up 14% year to date, TSM stock has lagged its sector despite being the largest and arguably most important chip company in the world. I wouldn’t expect this underperformance to continue for long, though.
On the date of publication, Joel Baglole held long positions in NVDA and MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.
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