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Much as the steam engine helped power the Industrial Revolution, semiconductors are in many ways the backbone that power today's information revolution.
A semiconductor is a microchip that allows any computing device to carry out the instructions a program sets forth. The size of the semiconductor industry should continue to climb with the levels of technology in our daily lives, though the growth won't be evenly distributed.
Here's a quick snapshot of some of the world's largest semiconductor companies today.
Data source: Google Finance.
This is a diverse industry, but for now let's focus on some of the more compelling opportunities for investors in the semiconductor space today.
Image source: Qualcomm.
I'm a huge fan of Qualcomm's (NASDAQ: QCOM) business. The two core operating businesses -- Qualcomm CDMA Technologies (QCT) and Qualcomm Technology Licensing (QTL) -- both play important roles in driving the performance of this semiconductor stock.
QCT, the chip business, dominates revenue production, having generated between 68% and 71% of Qualcomm's total sales in each of the past three fiscal years. If you're familiar with Qualcomm's products, it's probably through one of the names that come from QCT -- its Snapdragon processor, which powers mobile devices produced by a wide range of OEMs, including Samsung, HTC, BlackBerry, Microsoft, and many others.
The QTL division, meanwhile, produces a disproportionate amount of the company's operating profits. Thanks to its high-margin structure, it has accounted for 87% of Qualcomm's earnings before taxes in each of its past three fiscal years. This division is the straw that stirs Qualcomm's financial drink, and its outlook remains largely positive, thanks to the company's trove of patents relating to the foundational connectivity technologies that power 3G and 4G wireless devices.
This potent financial engine helps make Qualcomm a powerhouse in terms of both earnings and dividend growth, making it worthy of serious consideration for income-oriented tech investors. As just one of many impressive dividend stats, Qualcomm has averaged 25% annual dividend growth over the past three years alone. Little wonder this company stands as one of the top semiconductors stocks on the market today.
Image source: NVIDIA.
It's easy to look at NVIDIA's (NASDAQ: NVDA) soaring stock price over the past several years -- up over 235% in the past two years alone -- and conclude that you missed the boat. However, NVIDIA's exposure to several long-term secular growth categories makes that unlikely to be the case.
Considered a sleepy second fiddle to the biggest makers of mobile chips a few years ago, NVIDIA has skated where the figurative puck was heading in its industry. The company's high-end graphics processing chips have benefited from the rise of video-game trends such as multi-player online games and e-sports, and they'll probably continue to do so. This part of its business alone has led to impressive double-digit revenue growth in the gaming segment over the past several quarters.
Yet that only scratches the surface of this top chip stock. The kind of graphics processing in which NVIDIA specializes is well positioned for emerging growth industries within technology. One such application is deep learning and artificial intelligence. For example, teaching a computer to recognize images of an item requires the ability to process those images, a task for which NVIDIA's graphics semiconductors are ideally suited. This kind of graphics-heavy AI functionality will serve as a cornerstone for other growth verticals involving image recognition, such as self-driving cars, speech recognition and translation, and medical imaging, to name just a few.
It's for this reason analysts see NVIDIA's earnings per share growing at an average annual clip of 23.7% over the next five years. So while its forward P/E ratio of 33 isn't cheap, NVIDIA's place at the epicenter of several large tech growth markets still makes it one of the top tech stocks you can buy today.
Image source: NXP Semiconductor.
With NXP Semiconductor's (NASDAQ: NXPI) stock essentially flat since its March 2015 merger announcement with Freescale Semiconductor, you might think the market isn't enamored with the Internet-of-Things play. But you'd be wrong.
True, NXP Semiconductor's most recent quarterly report revealed some softness in demand for its various chips. NXP chief Rick Clemmer cited an "increased sense of caution" among the company's customers, and it bears reiterating that key NXP customers such as Apple are undergoing their own cyclical product sales slowdowns. Apple in particular is seeing its quarterly sales contract for the first time in 13 years.
Taking the longer view, though, it's easy to see how NXP Semiconductor's potent combination of its leadership position across several core product categories and its long-term growth potential will translate into continued growth for its shareholders. Case in point: NXP Semiconductor stock currently trades at 27 times its trailing-12-month earnings, which is reasonable given that its average profit growth over the next five years is forecast at an astounding 27%. Perhaps the rise in the Internet of Things was somewhat overhyped in 2014-15, but as long as the trend continues to grow, NXP Semiconductor figures to benefit tremendously.
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Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Infinera, Nvidia, NXP Semiconductors, and Qualcomm. The Motley Fool owns shares of Microsoft and has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.