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Semiconductor stocks comprise a major part of the technology sector. They manufacture chips, which are essential parts of many devices people use in everyday life, such as computers and smartphones. As the demand for these devices is strong and is not likely to slow anytime soon, semiconductor stocks enjoy excessive profits and have promising growth prospects ahead. In this article, we will discuss the prospects of three highly attractive semiconductor stocks.

Skyworks Solutions (SWKS)

Skyworks Solutions designs, develops, and markets proprietary semiconductor products used worldwide. Its product portfolio includes antenna tuners, amplifiers, converters, modulators, receivers, and switches. These products are used in diverse industries, including automotive, connected home, industrial, medical, smartphones, and defense.

Skyworks has an impressive performance record. It has grown its earnings per share in 8 of the last 10 years, at an average annual rate of 21% over the entire decade. A key driver behind this extraordinary performance has been the proliferation of smartphones, which include the chips of the company. Thanks to its exceptional growth record, the stock has more than quintupled over the last decade.

Even better, Skyworks has ample room for future growth thanks to the sustained demand for its chips. Analysts expect the company to grow its earnings per share by 15% per year on average over the next three years. Notably, the company has not missed the analysts’ earnings-per-share estimates for more than 20 consecutive quarters. Nevertheless, we prefer to be on the safe side and assume 10% growth of earnings per share over the next five years.

Moreover, Skyworks is currently trading at 11.5 times its expected earnings in 2022. This price-to-earnings ratio is much lower than the 10-year average of 15.0 of the stock. If the stock reverts to its average valuation level in five years, it will enjoy a 5.5% annualized gain in its returns. Given also its 1.7% dividend yield and 10.0% expected growth of earnings per share, the stock can offer a 17.2% average annual total return over the next five years.

ASML Holding N.V. (ASML)

ASML Holding is one of the largest manufacturers of chip-making equipment in the world. It is present in 16 countries, with approximately 30,000 employees, and has a market capitalization of $257 billion. The customers of the company include a wide variety of industries.

ASML is the only source of Extreme Ultraviolet lithography machines, which allow customers to produce ever-smaller integrated circuits. As a result, ASML has an essential monopoly in a very lucrative segment of the semiconductor industry. This helps explain the outstanding growth record of the company.

ASML has grown its earnings per share at a 22% average annual rate over the last decade. Even better, thanks to the sustained demand for its products and its dominant business position, the company has ample room to keep growing for several years. We expect ASML to grow its earnings per share by at least 14% per year on average over the next five years. Analysts expect the company to grow faster but we prefer to have a margin of safety in our calculations.

Moreover, ASML is currently trading at 33.4 times its expected earnings in 2022. This price-to-earnings ratio is lower than our assumed fair price-to-earnings ratio of 37.0 of the stock, which is in line with its valuation in the last seven years. If the stock reverts to its average valuation level in five years, it will enjoy a 2.1% annualized gain in its returns. Given also its 0.6% dividend yield and 14.0% expected growth of earnings per share, the stock can offer a 16.9% average annual total return over the next five years.

Microchip Technology Incorporated (MCHP)

Microchip Technology develops, manufactures, and sells smart, connected and secure embedded control solutions used in a wide variety of applications. These applications include disruptive growth trends, such as 5G, artificial intelligence, Internet of Things (IoT), and autonomous driving, in key end markets, such as automotive, aerospace and defense, communications. The company tries to offer solutions that are cost-effective and offer high performance.

Microchip Technology has a much more volatile performance record than Skyworks and ASML. While Microchip Technology has consistently grown its revenues over the last decade, it has spent hefty amounts on R&D expenses and operating expenses. Consequently, the company failed to grow its earnings per share between 2012 and 2021.

However, Microchip Technology currently enjoys extremely strong demand for its products. In the most recent quarter, the company grew its revenue 30% and its earnings per share 48% over the prior year’s quarter. Moreover, thanks to its immense backlog, Microchip Technology is likely to maintain its strong momentum for years. It is on track to finish its fiscal 2022, which ends in March-2022, with 37% growth of earnings per share. In addition, analysts expect double-digit earnings growth in the upcoming years. We expect Microchip Technology to grow its bottom line by 12.0% per year on average over the next five years.

Microchip Technology is also trading at a price-to-earnings ratio of 15.1. Thanks to its strong growth potential, the stock has traded at sky-high price-to-earnings ratios during the last decade. We prefer to be conservative and assume a fair price-to-earnings ratio of 18.0 for this promising growth stock. If the stock reaches our assumed fair valuation level in five years, it will enjoy a 3.0% annualized gain in its returns. Given also its 1.4% dividend yield and 12.0% expected growth of earnings per share, the stock can offer a 16.5% average annual total return over the next five years.

Final Thoughts

The above three semiconductor stocks have exciting growth prospects thanks to the secular growth of their business. In addition, thanks to the recent correction of the entire technology sector, these stocks have become attractively valued and hence they offer double-digit expected returns. Nevertheless, due to the high volatility of their stock prices, only the investors who can stomach high volatility for long periods should consider purchasing these stocks.