To declare that 2023 stood as a banner year for semiconductor stocks would be a gross understatement. The sector, as delineated by the VanEck Semiconductor ETF (NASDAQ: SMH), catapulted an astounding 73.4% over the year! If you had steered clear of this mercurial yet critical segment of the market, you would have unwittingly forfeited a chunk of the most prodigious gains of the year.

The rise witnessed in 2023 can, to a large extent, be attributed to the artificial intelligence (AI) revolution, which propelled some of the most prominent names in the domain, such as Nvidia and Advanced Micro Devices, to escalate by 239% and 128%, respectively.

Untapped Potential: Taiwan Semiconductor Manufacturing

Despite the meteoric sector-wide surge, Taiwan Semiconductor Manufacturing (NYSE: TSM) experienced a comparatively modest 42.3% uptick during 2023, including its 1.9% dividend. This left the stock trading at a mere 18 times trailing earnings and less than 16 times this year’s earnings estimates. A fairly modest price to pay for the world’s largest foundry, responsible for manufacturing virtually all of the world’s pivotal chips, ranging from Nvidia’s H100 accelerators to AMD’s Instinct MI300 and Apple’s M-series and A-series processors.

The year 2023 witnessed a sag in several pivotal semiconductor markets, including PCs and smartphones, continuing to dominate the chip end markets. TSMC incurred investor disillusionment after the second-quarter earnings, when AI chips manufactured by Nvidia accounted for only a mid-single-digit percentage of the overall industry. This revelation appeared to catch some investors off guard, particularly in light of the monumental growth Nvidia achieved. However, TSMC stock recuperated toward the end of the year, with growth exceeding expectations. The company’s monthly revenue, through November, was only 4.1% shy of 2022’s 11-month revenue, significantly outperforming the anticipated 10% decline.

With the inevitable replacement of the laptops and smartphones purchased during the 2020-2021 pandemic period, most likely by higher-end chips for AI PCs and other sophisticated devices, and with AMD’s CEO Lisa Su elevating the AI chip market outlook to $400 billion by 2027, from an initial forecast of just $150 billion in June, TSMC is poised for robust growth in the ensuing year. The company anticipates AI chips to grow from a mid-single-digit percentage of its revenue to a mid-teens percentage eventually, a conservative estimate in the face of a burgeoning AI market and a revival in other markets.

Resilience Amid Adversity: On Semiconductor

On Semiconductor (NASDAQ: ON) weathered a slowdown in the electric vehicle (EV) market throughout 2023, consequently witnessing a decline in stock value during Q2 and Q3, alongside the reduction in silicon carbide leader On Semiconductor. The alleviation of supply chain shortages in 2021 and 2022, paired with higher interest rates curbing EV demand, led to the deceleration of this market. A late summer report revealed mounting EV inventories at U.S. dealerships, prompting major automakers to curtail their battery and EV manufacturing plans.

On Semiconductor’s Q3 earnings report foretold a lackluster Q4, attributing the slowdown to a significant European customer pausing certain orders. However, fears that the EV market had plateaued may be premature, given that EVs continue to outpace traditional internal combustion engine (ICE) cars in the U.S., Europe, and China. As interest rates stabilize and charging infrastructure advances, customer adoption is expected to rebound. This presents a strategic opportunity for long-term investors in On Semiconductor, given the stock’s valuation at less than 16 times earnings and the company’s prospects of enhancing margins with the optimization of its new 300mm East Fishkill plant.

The Overlooked Gem: Kulicke and Soffa

Amid the AI revolution’s emphasis on producing the fastest, most power-efficient chip at the most advanced node, investors should not dismiss chip-packaging companies such as industry leader Kulicke and Soffa (NASDAQ: KLIC). These enterprises are marginally less glamorous and utilize more standardized machines to interconnect chips on a motherboard or even with each other, often via copper wires or small copper “bumps.”

As chips become increasingly intricate, greater attention will pivot to packaging. Particularly, as power and electricity concerns come to the fore, as more potent chips necessitate greater electricity and generate more heat. AI chipmakers have even started constructing chips made of “chiplets,” which are optimized for

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