2 Chip Stocks to Ride the Semiconductor Growth Wave

The semiconductor market is on a roll this year. According to the World Semiconductor Trade Statistics, global semiconductor revenue will grow 11.5% this year to $378 billion, a remarkable upgrade over the initial growth forecast of just 3%.

Strong memory pricing has played a critical role in the market's massive growth, thanks to the undersupply of DRAM (dynamic random access memory) and NAND memory. Looking ahead, semiconductor sales are expected to improve once again next year as memory market players will keep supply tight to maintain the pricing momentum.

Industry watchers forecast a 2.7% jump in semiconductor sales next year, though actual revenue could jump further as memory pricing momentum is slated to continue in 2018. This is great news for memory specialist Micron Technology (NASDAQ: MU), though investors shouldn't ignore the potential of Skyworks Solutions, (NASDAQ: SWKS) either, as it is on track to take advantage of another fast-growing sub-segment of the semiconductor space.

The case for Micron Technology

Micron Technology controls almost 22% of the DRAM market, so it is well-placed to take advantage of the secular growth that segment of the industry is expecting. Nomura estimates that the DRAM market will jump 6% next year as industry consolidation and an increase in 3D NAND will keep the supply in check.

But there's more to Micron than just the potential growth in memory pricing. The company is targeting certain segments of this market -- such as specialty DRAM -- to differentiate itself from rivals and build sustainable revenue streams. Micron's specialty DRAM business supplies over 20% of the segment's revenue, and it could keep getting better due to fast-growing end-markets such as automotive and graphics processing units (GPUs).

The GPU market could be a big deal for the chipmaker as it is supplying its DRAM to market leader NVIDIA. The graphics specialist started using Micron's GDDR5X memory last year. Now, Micron is the sole supplier of this type of memory, so for now, it can hang on to NVIDIA's coattails to take advantage of higher GPU shipments as the latter commands over 70% of this market.

Hence, Micron has the makings of a solid long-term investment case, driven by strong pricing and its efforts to attack specific niches in the memory segment to increase market share. Additionally, investors can lap up shares of the memory specialist at a reasonable valuation since it trades at just 15 times last year's earnings, which is way lower than the industry median of almost 23.

The case for Skyworks Solutions

The memory market isn't the only factor driving the semiconductor market's growth. The prices of wireless communication chips have increased almost 2% this year. Though not as impressive as memory pricing growth, investors should note that wireless chips sell in big volumes because they are deployed across a variety of applications in the category known as the Internet of Things (IoT), which includes smart home devices, and connected cars, among others.

This market is set to get bigger in the future as the number of devices connecting to the Internet is expected to take off remarkably, spawning the need for more wireless communication chips. Skyworks Solutions is well-aware of the opportunity presented by this space, so it has directed its recent product development efforts toward churning out IoT-related solutions.

For instance, the company recently partnered with IoT specialist Sierra Wireless to supply its 3G/4G connectivity solutions to power the latter's wireless modules. In all, Sierra will be using 17 chips from Skyworks to deliver an integrated voice and connectivity platform for the fast-growing machine-to-machine communications (M2M) market.

This partnership could be fruitful for Skyworks as Sierra commands a third of the global M2M communications market, which is expected to grow at an annual pace of 25% until 2020. Additionally, Skyworks is strengthening its position at key smartphone OEMs (original equipment manufacturers), especially from China.

Huawei has become a key Skyworks client and is placing chips worth $9 to $10 sourced from the chipmaker in each of its high-end devices. The chipmaker's stronger ties with Chinese smartphone companies such as Huawei, OPPO, and Vivo can substantially boost its chip shipment volumes as they are increasingly commanding a greater share of the global smartphone market.

Therefore, just like Micron Technology, Skyworks Solutions is pulling the right strings to take advantage of a booming semiconductor market. What's more, Skyworks' trailing earnings multiple of 20.5 indicates that it currently provides a good point of entry to prospective investors, as it trades slightly below the 23.4 industry average multiple.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia, Sierra Wireless, and Skyworks Solutions. The Motley Fool has the following options: short November 2017 $95 calls on Skyworks Solutions and short November 2017 $92 puts on Skyworks Solutions. The Motley Fool has a disclosure policy.