Fishing for chips: catch of the day or a red herring?

This article was first published in our Direct Investor Magazine on 3 August

This is a famously cyclical sector, so investors are rightly asking whether chips remain cyclical, or whether AI has fundamentally changed the economics of the industry. If they are still cyclical, as many commentators suggest, where are we in the cycle? I have chosen five of the most interesting and important semiconductor companies below to discuss their business models, financial performance and role in what can often feel like a highly complex industry. 

Those who are interested in learning more should start by reading the excellent book ‘Chip War’ by Chris Miller which won the 2022 Financial Times Business Book of the Year Award. It chronicles the technological, political and historical growth of the semiconductor sector from the invention of the transistor in 1947 through to the book's publication. He argues that chips are the foundation of modern power; the supply chain is highly specialised, fragile and concentrated in a few small pockets geographically; and that Taiwan is the biggest geopolitical chokepoint.

The price-to-earnings (P/E) ratio measures a company's current share price relative to its earnings per hare (EPS). It reveals how much investors are willing to pay for £1 of a company's profits, acting as a quick valuation tool to see whether a stock is overvalued or undervalued.

Nvidia 

Nvidia has been a stock market darling for the past five years and it’s easy to see why when you look at its share price returns. The stock has returned 900% over the past five years, rising from $20 to around $200. Even more extraordinarily, over the past ten years it has risen by 16,925% (from $1.17). In simple terms, a hypothetical $1,000 investment in 2016 would now be worth around $170,000, before currency effects, fees, and so on. 

Nvidia designs graphics processing units (GPUs) – specialised chips originally used for gaming graphics, but now vital for artificial intelligence and high-performance computing. Its chips, systems and software power AI data centres, helping companies train and run large AI models far faster than traditional processors. It also sells technology for gaming, professional visualisation, autonomous vehicles, robotics and healthcare, making it more of a full stack AI infrastructure company than just a chipmaker. 

The share price performance has been underpinned by enormous revenue growth (126%, 114% and 65% in Nvidia’s 2024, 2025 and 2026 financial years respectively) and net profit margins in excess of 50%. It currently trades on a trailing P/E ratio of 31x based on the last 12 months’ earnings. 

Taiwan Semiconductor Manufacturing Company (TSMC) 

TSMC is arguably the most important company in the global semiconductor industry, despite being far less well known than Nvidia. TSMC is a foundry, meaning it manufactures chips designed by other companies rather than designing its own. Firms such as Nvidia, Apple, AMD and Qualcomm rely on TSMC to turn their chip designs into physical products. 

This business model has proved extraordinarily successful because the cost of building leading-edge semiconductor fabrication plants now runs into tens of billions of dollars, making it uneconomic for most chip designers to manufacture their own products. TSMC dominates the global foundry market with around two thirds of the market share, and has become the manufacturing backbone of the AI revolution.

However, investors must also consider the geopolitical risks. Most of TSMC’s advanced manufacturing capacity remains concentrated in Taiwan, now the world's most important semiconductor chokepoint. Any disruption arising from tensions between China and Taiwan would have far-reaching consequences for the global technology industry. 

The share price has risen by 305% over the past five years, revenue growth has averaged 24% per annum over the same period and net income margins are typically around or over 40%. The company currently trades on a trailing P/E ratio of 32x.

ASML Holding 

If Nvidia is selling the gold and TSMC is refining it, then ASML is selling the picks and shovels. The Dutch listed company occupies one of the strongest competitive positions in global technology, manufacturing the lithography machines used to print microscopic circuit patterns onto silicon wafers. To put this into perspective, just one of the newest machines can cost up to $400m – it is no exaggeration to say these are some of the most complex and difficult machines on earth to build. More importantly, ASML is the only company in the world capable of producing extreme ultraviolet lithography machines, which are essential for manufacturing the most advanced chips used in AI, smartphones and high-performance computing. Every leading-edge chip produced by TSMC, Samsung or Intel ultimately relies on ASML’s technology. 

This monopoly gives ASML exceptional pricing power and a formidable economic moat. Its machines can cost hundreds of millions of dollars each and take years to develop, creating barriers to entry that competitors have so far been unable to overcome. For investors, this means that rather than trying to predict which chip designer or AI model will win the AI race, investors can own the company supplying critical equipment to them all. ASML also sits at the centre of US-China technology tensions, with export restrictions preventing it from selling its most advanced EUV machines to Chinese customers. 

The share price has risen by 197% over the past five years despite suffering a significant setback during 2024 and 2025. Revenue growth is more modest compared with Nvidia and TSMC at around 19% over the past five years, and net income margins are typically between 25-30%. The company currently trades on a trailing P/E ratio of 66x. 

Arm Holdings 

Unlike Nvidia, TSMC and ASML, whose businesses are tied to physical semiconductor products or equipment, Arm Holdings monetises the industry in a different way: by licensing intellectual property. The Cambridge-based company designs the underlying chip architectures that power billions of devices worldwide, from smartphones and tablets to data centres, cars and Internet of Things devices. Rather than manufacturing chips itself, Arm licenses its designs to companies such as Apple, Nvidia, Qualcomm and Samsung, receiving an upfront licensing fee and then collecting a royalty every time a chip incorporating Arm technology is sold. This asset-light business model has helped make Arm one of the most profitable and scalable companies in the semiconductor ecosystem.

Arm's competitive advantage stems from the near-ubiquity of its architecture, particularly in smartphones where its power efficient designs have become the industry standard. The more companies build products around Arm's technology, the more valuable its ecosystem becomes, creating significant switching costs for customers and a recurring stream of royalty income. Investors may recall Arm was a FTSE 100 company, sold to SoftBank in 2016 and subsequently floated on the US Nasdaq exchange in September 2023. 

The shares have risen by approximately 458% since their IPO on 14 September 2023 and both revenue and net income have grown at around 20% per year since public data was made available in 2021. Take note, however; the P/E Ratio is 419x earnings – significantly above the longer-term market average of around 15x and the other companies in this list. The valuation therefore reflects considerable optimism about future growth, with investors betting that Arm's technology will continue to play a central role in the next generation of computing.

Intel

(Full disclosure for illustration and not a recommendation: the author bought Intel in 2022 in his CSD account at around $45, watched the share price fall to below $20, then sold in late 2025 when it recovered to $40… only to watch it go up to $140 now. Investing is often very humbling.) 

No discussion of semiconductors would be complete without Intel. The company that helped create Silicon Valley and dominated the PC era for decades is probably the most recognisable name on this list. Unlike TSMC, Intel has historically been an integrated device manufacturer, meaning it both designs and manufactures its own chips. However, after years of manufacturing delays and growing competition from rivals such as AMD, Nvidia and TSMC, Intel lost much of its technological leadership and significantly underperformed the broader semiconductor sector. 

Today, Intel is one of the market's most closely-watched turnaround stories. The company is investing tens of billions of dollars in new fabrication plants and attempting to transform itself into a foundry business capable of manufacturing chips for external customers, directly challenging TSMC's dominance. Success would not only improve Intel's economics but also strengthen Western semiconductor supply chains, an objective supported by substantial government incentives under the US CHIPS Act. 

Having been one of the worst performers in the S&P 500 up to mid 2025, the share price is up 523% over the past year. Revenues have been on a downward trajectory from $79bn in 2021 to $53bn in 2025, but appear to have bottomed out over the past two years. Similarly, net profits fell from over 25% to negative over the past two years, meaning there is no P/E ratio, but it's trailing P/S (price-to-sales) ratio is around 12.

What should investors be thinking about in this sector? 

The first thing I would suggest for investors is carrying out a simple audit of their exposure to semiconductor companies. If you hold broad global equity indices, you are likely to have significant exposure already due to the sector's large weighting in major benchmarks. If you hold technology-focused funds or ETFs, that exposure may be even higher. For investors selecting individual shares, the exercise is usually more straightforward. 

Investors then need to think about two things: what they believe the prospects are for semiconductors over both the near and long term, and whether current valuations adequately reflect those prospects. This will almost inevitably lead to a view on AI, one of the most hotly contested investment themes of the moment. Remember that long-term share price returns are ultimately driven by earnings growth, changes in valuation multiples, or a combination of both. 

A longer investment horizon can help investors look through inevitable periods of market volatility. If the prospect of researching semiconductor companies and making these judgement calls feels overwhelming, exposure to a diversified global index through a low-cost passive fund or ETF which can be found on our Preferred List. This can provide exposure to the theme without requiring investors to pick individual winners. Whether semiconductors ultimately prove to be the catch of the day or a red herring, they have become too important for investors to ignore. 

Please note: this article is for educational and general information purposes only and does not constitute any form of advice. The shares highlighted are to illustrate the points being made in the article and should not be taken as any kind of recommendation. Investors should conduct their own due diligence prior to making any purchase or sale and can utilise Charles Stanley Direct’s coaching team for help and guidance if required. All share price and financial information are sourced from FactSet up to the end of June 2026.