In the rolling correction that’s running through the stock market, chip makers have been hit harder than most.
Those are admittedly among the scariest words in investing. But the chip sector has changed so much it really is different now – in ways that suggest it is less likely to crush you. “There is no aspect of the modern digital economy that can function without semiconductors,” says Motley Fool chip sector analyst John Rotonti. “That means more chips going into everything. The long-term demand is there.”
In chip design software, you have Cadence Design Systems CDNS, +2.22% and Synopsys SNPS, +0.28%. In production equipment, companies dominate specialized niches like ASML ASML, +0.85% in extreme ultraviolet lithography . Manufacturing is dominated by Taiwan Semiconductor TSM, -2.17% 2330, -1.25% and Samsung Electronics 005930, -0.55%.
Both have solid profitability. Qualcomm was recently hit by one-off issues like bad weather in Texas that disrupted production, but the company has good exposure to the 5G phone trend. ON Semiconductor is expanding beyond phones into new areas like autos, industrial and the Internet of Things connected-device space.
Their software-based design tools help chip innovators create the blueprint for their chips, explains Rotonti at Motley Fool, who singles out these names. “They are not the fastest growers in the world, but they have good profit margins.” They also dominate the space. Next, big tech companies like Alphabet GOOGL, +1.29% GOOG, +1.11%, Apple AAPL, +1.02% and Ammazon.com AMZN, +0.38% are all doing their own chip design, which threatens specialized chip companies that do the same thing.
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