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During 2023, the Biden administration initiated multiple semiconductor restrictions on China. The goal is to make China less competitive by covering both specific chips from Nvidia and the semiconductor manufacturing equipment. In October, Gina M. Raimondo, Commerce Department Secretary, noted as much:

“The goal is the same goal that has always been, which is to limit PRC [People’s Republic of China] access to advanced semiconductors that could fuel breakthroughs in artificial intelligence and sophisticated computers that are critical to PRC military applications.”

At the time of the restrictions announcement, major chip stocks dropped from Intel and AMD to Nvidia. Furthermore, this affected companies outside the US but within its zone of interest. As a case in point, Dutch ASML is critical to the success of such restrictions due to the company’s monopoly on delicate photolithography machines used in semiconductor manufacturing processes.

As of November’s South China Morning Post reporting, this accelerated China’s stockpiling of ASML-made equipment. In addition to this dynamic, electronics inventory refilling, 5G infrastructure, and AI hype set the stage for less-cyclical demands and earnings.

Considering this interim period in which China adjusts and builds its own chip foundries, investors can play on the US-China tensions. These are the three chip stocks to consider.

ASML Holding (Nasdaq: ASML)

The aforementioned chip foundry in the Netherlands is the key cog in the global semiconductor industry. ASML cornered the market on highly precise and expensive extreme ultraviolet (EUV) lithography machines as the sole supplier. 

These machines craft circuits onto silicon wafers in an ongoing quest to miniaturize semiconductors and make them more powerful. Given that the Netherlands is a part of the Nine Eyes intelligence-sharing program, the country is firmly in the US zone of influence.

Nonetheless, in October’s press release ahead of the Q3 earnings report, ASML doesn’t expect export controls to impact the long-term outlook for either 2025 or 2030 significantly. For the quarter, AML reported net sales of €6.7 billion with a net income of €1.9 billion. For the end of 2023, ASML CEO Peter Wennink expects a 30% net sales increase compared to 2022.

“The semiconductor industry is currently working through the bottom of the cycle and our customers expect the inflection point to be visible by the end of this year.”

ASML CEO Peter Wennink

Although new chip export controls affect ASML’s most advanced offering, it can still supply “legacy systems” to China, such as deep ultraviolet (DUV) lithography machines. According to ASML’s representative in China, Shen Bo, the company has a €35 billion backlog of such chips from 2021 to 2022.

Based on 14 analyst inputs pulled by Nasdaq, ASML stock is a “strong buy.” The average ASML price target is $721 vs current $681. The high estimate is $750, while the low forecast is $664 per share. 

GlobalFoundries Inc. (Nasdaq: GFS)

Headquartered in Santa Clara, California, GlobalFoundries is the world’s third-largest chip foundry. At the end of 2022, the company got onto Newsweek’s “America’s Most Responsible Companies 2023” list. As with other ESG-integrated companies, this gives GlobalFoundries easier access to capital and debt financing.

In November’s Q3 earnings, GlobalFoundries surprised investors by forecasting above-consensus performance for Q4. The sector is bottoming due to electronics inventory clearance and the drop in post-lockdown demand. In preparation for the chip cycle upturn, GFS stock jumped nearly 10% in mid-November.

GF reported an 11% year-over-year revenue decline for the quarter to $1.8 billion. Likewise, its profitability slightly decreased, with its operating margin going from 17.2% to 14.1% for the same period. These supply glut signals indicate the cycle’s bottom for the aforementioned reasons.

Nonetheless, GF’s adjusted earnings at 55 cents beat the 49 EPS estimate.

Based on 15 analyst inputs pulled by Nasdaq, GFS stock is a “strong buy.” The average GFS target price is $68.41 vs. the current price of $52. The high estimate is $79.7, while the low forecast is $61 per share, above the price at press time.

Applied Materials, Inc. (Nasdaq: AMAT)

The Californian foundry is the key supplier of equipment needed for chip manufacturers. The latter can produce memory, such as DRAM and NAND, and logic chips, such as GPUs and RF chips, in the wireless device arena.

In the Q4 earnings report, Applied Materials reported a relatively flat year-over-year revenue of $6.72 billion, a 3.8% uptick. However, the company still beat the consensus estimate of $1.98 earnings per share (EPS) at $2.12. Although the memory demand declined 39% year-over-year, it bumped up 23% for the quarter.

More recently, on December 1st, Applied Materials reported a milestone achievement of reaching Scope 1,2 and 3 emissions reduction targets based on the Science Based Targets initiative (SBTi). Fitting into the climate change narrative, the company further expands its access to capital by leveraging impact investing. 

Although AMAT stock suffered a 7% drop on November 17th, following the news of the DoJ probe into evading chip export controls, the company is still in a strong position to rise from the cycle’s bottom.

Based on 30 analyst inputs pulled by Nasdaq, AMAT stock is a “strong buy.” The average AMAT price target is $164.89 vs the current $147. The high estimate is $185, while the low forecast is $128, mainly owing to the uncertainty of the DoJ probe.

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