The semiconductor shortage that is currently facing global manufacturers will produce winners and losers. There are multiple sectors being hit, particularly the tech and automotive industries.
The shortage wasn’t caused by any single factor. Rather, multiple factors conspired in creating a serious shortage. But the pandemic was the overarching cause. Tech and automotive sectors have been especially hard hit, but why?
Tech has been hard hit because trends like work from home and school from home have increased the demand for electronics. Yet there simply isn’t enough supply.
Current business models regarding design and fabrication play a huge role too. More and more semiconductor companies are fabless, meaning they design chips and outsource the manufacturing to other companies. That has created a bottleneck.
On the automotive side, manufacturers were hit with production line shutdowns due to the pandemic. Some had to deny chip shipments and are now finding they can’t easily resume shipments.
Trump’s trade war on China also plays a role in the global shortage. Many fabless companies had to switch over from Chinese fabricators. The results are far-reaching and there are semiconductor companies poised to benefit from the situation.
- Taiwan Semiconductor Manufacturing (NYSE:TSM)
- Teradyne (NASDAQ:TER)
- ASML Holding (NASDAQ:ASML)
- NXP Semiconductors (NASDAQ:NXPI)
- Renesas Electronics (OTCMKTS:RNECY)
- Lam Research (NASDAQ:LRCX)
- Applied Materials (NASDAQ:AMAT)
Semiconductor Stocks: Taiwan Semiconductor Manufacturing (TSM)
Taiwan Semiconductor Manufacturing is clearly winning from the shortage. It is clear that the semiconductor industry as a whole relies on a few companies in Asia for fabrication. That’s why it’s becoming clear that there’s a reasonable case for arguing TSMC is the world’s most important company.
TSMC pioneered the foundry model that currently dominates the semiconductor industry. So, it simply makes sense that the company is winning in the shortage. It controls a 57% share of the foundry market currently. And the company isn’t simply winning because current trends have conspired in its favor. Rather, TSMC stock has been winning since it hit the market. TSMC has provided a 17.2% CAGR in revenue since listing in 1994. It expects 10-15% CAGR through 2025.
In 2020 smartphone chips accounted for 48% of TSMC’s sales, high-performance chips another 33%, and auto chips only 3%. Yet, the company clearly sees an opportunity and has reallocated wafer capacity toward the automotive industry. GM has warned that the shortage could result in $2 billion being erased from its profits in 2021. AlixPartners anticipates a $60.6 billion reduction in global automotive revenues to result.
TSMC’s production lines are running at 100% utilization and the re-prioritization toward automotive chips will keep it winning. The company is the foundry solution leader serving many of the design semiconductor companies and will continue to win because of that.
Even prior to the shortage, Teradyne was winning. Q4 2020 revenue grew 16% year-over-year with full-year revenue growing 36% in 2020. TR stock holders were happy as well, as EPS increased 65% in 2020.
Teradyne is currently focused on AI neural decision processors and a partnership with Syntiant. But more broadly the Reading, Massachusetts company provides testing solutions for electronics including semiconductors.
Teradyne is well poised to capitalize on the burgeoning semiconductor test market. The market can broadly be divided into SOC (System on a Chip) and memory. Teradyne anticipates 8% and 11% growth in these sectors, respectively. Smartphone chips are continuing to grow in complexity, a trend that doesn’t show signs of slowing. This is driving higher test demand at Teradyne.
Teradyne also expects a surge in Automotive Test SOC in the first quarter which should keep the company’s 2020 strengths moving forward. Semiconductor test accounted for $524 million of Teradyne’s $720 million in Q4 sales. That high percentage, combined with the conditions affecting the auto sector, mean good things for the company as the shortage continues.
ASML Holding (ASML)
ASML builds equipment used in the fabrication of semiconductors. The company supplies important players in the industry including Asian giants Samsung and TSMC, as well as Intel (NASDAQ:INTC) stateside.
Being that the initial hints of the semiconductor shortage appeared in early 2020, ASML is already winning. That’s because ASML stock is up 89% from one year ago as of this writing. I have to assume that it has a strong chance to continue winning as a result of the opportunity posed by this shortage.
The catalyst here is obvious, more companies will require semiconductor manufacturing equipment to address the shortage and capitalize on the favorable supply and demand dynamics.
ASML is the leader in lithography systems. With its market share in the sub-sector being characterized as a near monopoly. In the production of a microchip, patterns are printed onto silicon which is the lithography process. ASML recorded sales of EUR 14 billion ($16.9 billion) in 2020, up EUR 2.2 billion from 2019. It shipped 258 lithography systems during the period.
The company has undertaken a share buyback program through 2022 in which it will repurchase up to 6 billion Euros worth of shares. This should be favorable to share prices aside from its strong position in the shortage.
NXP Semiconductors (NXPI)
I’d like to shift gears and take a look at the automotive industry. Of course, it is poised to be particularly hard hit as a result of the shortage. That’s why I think that companies including NXP Semiconductors can really benefit from the circumstances.
In fact NXPI stock has already been trending upward, having appreciated by 29.6% in the last three months. In the month or so since this shortage has garnered headlines, NXPI has gained favor with better analyst ratings posted in that period. This broadly indicates that Wall Street thinks the company is in a strong position relative to the shortage. This is partly due to its broad portfolio of semiconductor automotive products.
Automotive was far and away the company’s largest revenue driver contributing 44.4% of 2020’s total. And although automotive revenues actually shrunk 9% in 2020 it doesn’t look like 2021 will be the same. There’s every chance that NXPI stock leans into this opportunity. If it can reduce the shortages auto manufacturers face, revenues and profits look ripe for the taking.
Renesas Electronics (RNECY)
The $60.6 billion hit to automotive revenues predicted by AlixPartners as a result of the shortage puts Renesas in prime position. The Japanese provider of ‘in-vehicle control’ semiconductors is a cheap play to win during the shortage with strong catalysts. RNECY stock trades in the pink sheets around $5-6 and has lots of favor on its side. It’s nearly a unanimous buy according to the analysts covering it.
Renesas’ solutions comprise essentially the entire vehicle in regards to semiconductors. Its chips are used in ADAS and autonomous systems, the body, chassis, infotainment, powertrain and EV battery systems.
The company is roughly evenly split between automotive and IoT/industrial business as sources of revenue. Or at least it was during 2020 as a result of the pandemic. 2020 saw Renesas’ IoT/industrial business revenues outpace its automotive revenues as a result of the decrease in vehicle production. In 2019 that balance favored automotive revenues for the company.
Lam Research (LRCX)
I think Lam Research is winning during the semiconductor shortage because it is a strong wafer processing semiconductor manufacturing equipment maker. That’s a mouthful but the company simply makes the equipment that makes semiconductor wafers.
The company boasts strong profitability metrics with operating and net margins as well as ROA and ROE all above 90th percentile ranked against peers. The other metric that tells me that LRCX stock is a wise investment is it’s return on invested capital of 45.59%. This vastly outstrips its capital costs. So, to me it looks attractive in normal times as well as the current environment surrounding semiconductors.
Sooner or later, the U.S. is going to make a push toward onshore fabrication. I think one outcome of this current situation is that some fabrication will leave Asia once the conditions are right. Companies are surely realizing that fabrication needs are risky under the current business model. That should lead to manufacturing opportunities in the U.S.
Lam Research is a U.S.-headquartered company and makes sense as a beneficiary under such a scenario. The U.S. only accounted for 4% of 2020 Q4 revenues but that may change. China, Korea, and Taiwan made up 73% of revenues for the same period.
Immediately though, Lam Research should benefit as fabricators globally attempt to ramp up in order to meet the demand shortage.
Applied Materials (AMAT)
Applied Materials focuses on materials engineering. Materials engineering creates the scientific breakthroughs that drive the atomic level improvements in semiconductors. AMAT stock represents the breakthroughs that power the highest tech applications in semiconductors. All of the improvements in IoT, AI and tech rely on companies like Applied Materials.
The company invests over $2 billion annually in R&D with 30% of its employees in research. Its library of over 14,300 patents and research center make it the brains behind semiconductors. Applied Materials recorded $17.2 billion of revenue in the trailing 12 months prior to Q4 2020. And semiconductor systems revenue rose 26% in that same period.
The company sees a huge opportunity in foundry nearer term, but also looks toward AI and digitization on a longer horizon. Revenues rose 25% in 2020, and margins increased 190 basis points.
Look for Applied Materials to continue its record semiconductors systems revenue from the fourth quarter through this shortage.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Alex Sirois is a freelance contributor to InvestorPlace whose personal stock investing style is focused on long-term, buy-and-hold, wealth-building stock picks. Having worked in several industries from e-commerce to translation to education and utilizing his MBA from George Washington University, he brings a diverse set of skills through which he filters his writing.