Everyone Is Talking About Chip Stocks: Are They a Good Long-Term Option?

Chip stocks have been all the rage, but what are long-term investors really in for by buying them on the TSX today?

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Semiconductor chip stocks have been all the rage in the last few months. Companies around the world, quite literally, have exploded in share price. Even the ones related to these companies in any way. But, are chip stocks really a good long-term option, or just another bubble set to burst?

The outlook

Before we get into the stocks themselves to consider, it’s important to learn more about the chip market in general. The global semiconductor market has surged in growth, and is expected to reach US$1.3 trillion in value by 2030. This would represent a compound annual growth rate (CAGR) of 7.4%. So certainly not any where near the growth we’ve seen in the last year.

However, there are key drivers involved. They include the rise of artificial intelligence (AI), which also looks to grow significantly. While there’s been a lot of attention on this area, there’s more to consider as well. The Internet of Things (IoT), 5G technology, autonomous vehicles, and cloud computing will also need chip stocks.

In fact, if it’s digital, it needs semiconductor chips. And those will need to be increasingly powerful, efficient, and fast. What’s more, countries are almost treating this like oil, trying to create less reliance on imports and making investments in their own products. So yes, the chip market is a strong one.

Challenges remain

While the chip market may be growing, there are still hurdles ahead. For instance, we’ve experienced supply-chain disruptions again and again, with the recent chip shortage highlighting the fragile industry. What’s more, this is exacerbated by geopolitical tensions, especially with China, a large supplier.

What’s more, there is also a shortage of talent! The industry continues to face the issue of having enough skilled engineers and technicians with the ability to make chips even better. And this will be crucial for growth.

And, as with everything, there is a large environmental impact with chip manufacturing. It’s an energy-intensive process that generates waste. Sustainability will be key, but of course this also creates the opportunity to fill this gap.

Where to invest

There is a lot of interest in chip stocks these days, but I would perhaps consider that while promising, there are still many challenges. Instead, it might be prudent to invest in companies that are not directly but semi-involved with the growing chip market.

One company would be Celestica (TSX:CLS). Celestica stock is a global electronics manufacturing service. It helps major semiconductor companies assemble and test their chips, while not creating them directly. Yet the core of their business lies with printed circuit board assembly, one of the largest in the world.

And this stock has also been rising higher and higher, but perhaps offers less volatility given its diversified structure. Celestica stock recently reported fourth quarter earnings that beat estimates, and increased its guidance for 2024. It should now see revenue rise between 8% and 10% in 2024, with earnings per share up to $4.20!

Overall, it’s a well-positioned company up an insane 187% in the last year. However, it trades at just 18.5 times earnings over the last year, offering more value. And looking long term, shares are up 400% in the last decade, and 317% in the last five years as well. So if you’re looking at chip stocks, this is the one to watch.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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