The pandemic accelerated demand for home desktop and laptop computers. At the same time, automobile companies increased their volume of technology in vehicles. This led to a semiconductor chip shortage. The lower supply will increase prices, potentially inflating the cost of technology products.
Technology manufacturers will rely on contracts and inventory to delay any price hikes. They want to avoid passing prices to consumers for as long as possible. Similarly, automobile firms are cutting production. They, too, are opting to lower product inventory to keep prices in check. Demand is elastic for automobiles and computers. The higher prices rise, the lower the demand.
The novel coronavirus vaccine rollout worldwide is set to taper the work-from-home setting and the lockdown. Theaters are starting to open again. The Centers for Disease Control said that you can gather indoors with vaccinated people. All without wearing a mask. The mind shift sets the stage for a gradual re-opening. So, as computer orders slow, the chip shortage should also end.
There are seven tech stocks desperate for an end to the chip shortage. Listed in alphabetical order, they are:
- Advanced Micro Devices (NASDAQ:AMD)
- Applied Materials (NASDAQ:AMAT)
- Intel (NASDAQ:INTC)
- Micron Technology (NASDAQ:MU)
- Nvidia (NASDAQ:NVDA)
- Qualcomm (NASDAQ:QCOM)
- STMicroelectronics (NYSE:STM)
In the chart, all of the stocks score a solid 91/100 or higher on quality. AMD stands out as trading at unfavorable valuations but has a strong overall score.
STM stock has a lower overall score due to a pullback in the last month.
Tech Stocks: Advanced Micro Devices (AMD)
Rumored to supply the graphics chip for Tesla’s (NASDAQ:TSLA) Model S and X refresh, AMD would benefit from an end to the chip shortage. As Tesla works through its production delays and resumes building more Tesla units, AMD’s Navi 23 GPU sales would increase.
If Tesla implements that Ryzen System-on-Chip, it would make it one of the fastest infotainment systems available for customers. The chip is powerful enough to run a graphics-intensive game. A supply deal with Tesla would broaden AMD’s revenue stream.
The chip giant needs a bigger exposure in the ever-growing automotive market. Vehicles are getting more semiconductor chip volumes. Conversely, the computer market is only as strong as the work-at-home lift. That is set to end.
To prepare for a peak in PC sales, AMD needs more Navi 23 orders. Admittedly, the PC market remains strong. AMD Chief Technology Officer Mark Papermaster said that its CPU design is a key aspect of AMD’s resurgence over the years. The Zen 3 shipping began at the end of last year with the Ryzen 5000. In the server space, AMD is now on a third-generation EPYC.
Applied Materials (AMAT)
Chief Financial Officer Dan Durn said that the company will benefit from a third PC wave. Plus, the consumer-oriented mobile handset demand lifted semiconductor demand. This contributed to the chip shortage.
AMAT is optimistic that the tight coupling between population and consumer behavior will end. Instead, corporations will invest in machine-to-machine solutions. That will lead to another decade of upside for Applied Materials.
The drive for economic growth and ongoing pressures to increase productivity will sustain demand for AMAT’s wafer fab equipment. In its traditional market, storage (NAND chips) and DRAM (memory chip) demand are still strong. Customers from China continue to grow, thanks to the region’s technology innovations.
Applied said the industry size topped $60 billion last year. It forecasts an industry of more than $70 billion this year and more than $100 billion in the next few years. So, the chip shortage should not hurt its long-term prospects
Intel struggled for much of last year from CPU shortages. This led to the B460 and H410 chipsets reportedly out of stock. Customers who built computers in mid-2020 are only now taking delivery. As new games and advanced software demand more computing power, the delay is hurting customers.
The ongoing delay in the current and next quarter will slow sales. Customers will have no choice but to wait for parts to become available. As the biggest PC chip seller, Intel likely posted a small 1.1% drop in fourth-quarter revenue due to the shortage.
Intel will benefit as the industry resolves the chip shortage this year. It already has three strategic priorities to work on. CEO Bob Swan said that they are “improving our execution to strengthen our core business, extending our reach to accelerate growth and redefine our position in the industry, and continuing to thoughtfully deploy capital to create value for our shareholders.”
A check shows 31 analysts cover Intel stock. Per tipranks, the average price target is around $63.
Tech Stocks: Micron Technology (MU)
Micron’s CFO, Dave Zinsner, is optimistic about the strong multi-year demand for DRAM. More end markets need memory chips, such as mobile and cloud. So, as computing transitions to artificial intelligence and automotive, Micron is expecting a strong market for DRAM.
Zinsner said that the tightness for DRAM will probably continue for at least 2021. Furthermore, he said that the company does not have much visibility yet going into next year. To adjust for the uncertainties ahead, it will watch for the industry aligning supply with demand. The executive expects the industry will exercise disciplined investing and supply increases.
The semiconductor industry is cyclical. So, by keeping close to the supply/demand equilibrium, the next boom/bust cycle may be milder.
No chip company has a bigger shortage problem than Nvidia. The Bitcoin craze continues to increase the demand for Nvidia graphics cards. Gaming customers are getting punished. The lack of supply is pushing the prices of the latest products.
Nvidia’s RTX 30xx series are the latest GPUs that consumers want. Just as the newest ones were impossible to buy last year, the same is happening this year. Gamers may add themselves to a waitlist. It will take months before they may pick up the gaming graphics card.
At the start of the year, the prices of the 3000 series from ASUS increased. Look out for prices increasing again alongside the price of Bitcoin.
Investors may build a five-year DCF EBITDA Exit model to calculate a fair value.
|Discount Rate||10.5% – 9.5%||10.00%|
|Terminal EBITDA Multiple||34.5x – 36.5x||35.5x|
|Fair Value||$612.07 – $672.55||$641.76|
Setting a 10% discount rate to account for the cyclical risks in semiconductor stocks, NVDA stock is worth around $642.
The chip shortage is hurting Qualcomm. The firm is struggling to meet the strong demand for its processors. Its customer Samsung Electronics (OTCMKTS:SSNLF) is experiencing a shortage of Qualcomm application processors.
As a leading supplier to a fast-growing smartphone market, Qualcomm would benefit greatly from an end to the chip shortage. Samsung will meet second-quarter expectations. In the near term, it will still need to cut handset shipments.
Qualcomm’s Snapdragon 888 is manufactured with Samsung’s 5-nanometer manufacturing. As Reuters reported, this is hard to scale up quickly.
QCOM stock peaked in early February. At a forward price-to-earnings in the mid-teens, markets unwittingly punished the stock for no reason. It commands an excellent profit margin and demand inelasticity. It may raise prices to offset the constrained supply. This would give profit margins a lift.
Tech Stocks: STMicroelectronics (STM)
This auto chip supplier discussed its shortage problems on its last conference call. President and CEO Jean-Marc Chery said that it did not face any shortage of silicon carbide. So, its second half will perform better than the first half of 2021 and better than last year.
STM faced some shortages in materials like a substrate.
This year, the production of 84 million to 90 million vehicles, plus a build-up in customer inventory, will drive semiconductor demand in automotive. Conversely, Chery mentioned that a drop in business from Huawei will weigh on results. He said, “Huawei will be a detractor, definitively in 2021 of the revenue.”
Looking ahead, STM forecasts solid revenue growth for the year. Smart mobility, Internet of Things, 5G, and power energy management will lead the outperformance in the markets it serves.
STM stock gets very little attention despite its sustained uptrend over the last year. Once the industry works through the supply shortage, this firm will benefit from strong automotive demand this year.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Lau is a contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns.