At a Virtual CEO Summit on Semiconductor and Supply Chain Resilience earlier this month, President Joe Biden said the U.S. needed to focus on investing in its chip “infrastructure” to address an ongoing shortage of semiconductors in the U.S.
It was music to the ears for several industries badly hit by the immediate crisis, which has affected key industries like consumer electronics, pharmaceuticals and auto manufacturing. White House officials conducted meetings with 20 chief executives.
“These chips, these wafers … batteries, broadband — it’s all infrastructure. We need to build the infrastructure of today and not repair the one of yesterday,” the 46th president of the United States said during the meeting. “The plan I propose will protect our supply chain and revitalize American manufacturing.”
Out of all the industries hit by the shortage of semiconductors, the auto sector has had to weather the hardest blows. General Motors (NYSE:GM) and Ford (NYSE:F) could collectively lose $4.5 billion this year due to the semiconductors shortage.
The positive thing is that Biden has been aggressive in building out capacity to address the crisis. The White House’s $2 trillion infrastructure bill has a $50 billion component for the semiconductor industry.
Biden’s plan to devote billions from the American Jobs Plan to chip production is to boost manufacturing capacity at home since the country is reliant on Japan, South Korea, Taiwan, and China for semiconductors at the moment.
Semiconductors stocks, against this backdrop, are primed to do very well moving forward. The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) has eked out a 1.58% gain over the past month as the chip shortage has moved to center stage.
We have picked seven companies that you should consider a position in if you want to play this red hot space.
- Lam Research (NASDAQ:LRCX)
- Teradyne (NASDAQ:TER)
- Intel (NASDAQ:INTC)
- Advanced Micro Devices (NASDAQ:AMD)
- Nvidia (NASDAQ:NVDA)
- Qualcomm (NASDAQ:QCOM)
- Brooks Automation (NASDAQ:BRKS)
Semiconductors Stocks: Lam Research (LRCX)
Lam Research is one of the biggest players in semiconductor equipment. Based in Fremont, California, the company is involved in the design, production, marketing, and service of semiconductor processing equipment used to fabricate integrated circuits.
The company has excellent fundamentals and a strong balance sheet. The bottom line and the top line of the semiconductor company have increased 34.9% and 15.4%, respectively, in the last five years. All of the major operating metrics, including gross margin, operating margin, net margin, return on assets, return on equity, and ROIC, are strong and have outperformed the S&P 500 index and the industry, as of the last reporting date.
Moving forward, the U.S. is pushing toward greater onshore fabrication. From its physical base in California, Lam Research stands to benefit from this pivot to the U.S. from Asia.
With $6 billion in cash against $5 billion in debt, the company also has a solid base to invest in manufacturing facilities in the U.S. Those operations 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.
LRCX stock is up 9.73% over the past month.
Teradyne is an American automatic test equipment designer and manufacturer. Although it has several segments, the company’s biggest revenue contributor is semiconductor testing.
Teradyne tests approximately 50% of all semiconductors worldwide. So, no surprises that out of total revenues of $759 million for the fourth quarter of 2020, $524 million was due to semiconductor testing.
In the last 12 quarters, the North Reading, Massachusetts-based company beat Wall Street analysts’ consensus earnings estimates every time. Most recently, in the fourth quarter, the company reported an EPS of $1.10 per share, rising 25% year-over-year from the figure of 88 cents last year and beating the $1.01 consensus of the 17 analysts tracking the company.
Revenue of $759 million in Q4 2020 grew by 16% from Q4 2019. For the full year, EPS jumped 62%, and revenues increased by 36%. Gross profit and operating profit margins stand at 57.2% and 29.3%, both better than the industry average and S&P 500.
TER stock is up 7.96% over the past month.
Intel stock saw a substantial drop in 2020, lagging behind the broader semiconductor industry. INTC lost 16.1% in the year compared to a 49.8% increase in SOXX.
The company has also lost the top position among chipmakers as measured by market capitalization. The fact isn’t lost on its major investors. activist hedge fund Third Point has a $1 billion stake in Intel.
Last year, Third Point Chief Executive Daniel Loeb went after the company, arguing it needs to change in the interest of national security. He urged Intel to sell some of its acquisitions and divide design and manufacturing to take advantage of cost synergies.
Intel is aware of these issues. Supply challenges are a serious challenge that the U.S. firms need to maintain their pole positions within their industry. Intel is planning to spend $20 billion on two new chip factories in Arizona.
One thing to note here is that the company is focused on maintaining a strong U.S. presence instead of outsourcing advanced chip manufacturing to Taiwan and South Korea. That will pay dividends with the strong “Made in the USA” push that President Biden is focusing on.
One can understand the frustrations of major investors. But everyday investors should put faith in Intel’s strategy. Plus, in a red-hot investing space, the fact that shares are trading at 13.9 times forward price-to-earnings makes INTC stock one of my favorite semiconductors names out there. As a comparison, Nvidia and Advanced Micro Devices are trading at 45.5 times and 41.2 times, respectively. (See below)
Advanced Micro Devices (AMD)
Nvidia and Advanced Micro Devices are the two most prominent players in the semiconductors space. In the last five years, AMD has outperformed the S&P 500 by 2,809.1% and its sector by 2,658.6%. Meanwhile, the technology sector exceeded the market by 150.4% during the same period.
The momentum is not expected to stop anytime soon. AMD’s next-generation EPYC processor will keep chomping away market share from Intel and others in the industry.
As we discussed in the previous section, AMD, and other companies that rely on outsourcing, have cost advantages over companies like Intel that focus on domestic supply. Intel could benefit in the long run from this approach due to the national security aspect of the debate. But for now, AMD will have a better bottom line.
On April 15, Raymond James initiated coverage on AMD stock with an “outperform” rating and a $100 price target, 26% upside from the recent $79.27 close. AMD’s “durable technical advantage” over Intel and increasing server business is the basis of its bullish view.
The only thing going against the stock is valuation. However, it’s such a strong performer; you can rest easy with this one in your portfolio since the trajectory is generally upward.
Nvidia is a specialized semiconductor manufacturer that operates in two segments. Although it has grown its software sales, the company’s day-to-day operations are dominated by semiconductor designs.
Much like AMD, NVDA stock has done incredibly well over the last five years, beating the S&P 500 by 1,486.2% and its sector by 1,335.8%. Much of that has to do with its excellent operating performance. It has beaten Wall Street estimates 11 times out of the last 12.
Nvidia’s main concern in the interim will be maintaining their supply chains during the current chip shortage. Demand will continue to be high for its graphics cards and mobile processors in 2021 and beyond. Hence, this is not a company that you should worry about when it comes to either top line or bottom line growth.
Qualcomm stock is down 19% in the last three months. It’s one of the hardest hit companies in the sector due to the chip shortage. The fabless semiconductor company depends on third parties to produce its chips and is struggling to keep pace with the shortage.
Nevertheless, the company remains an excellent performer. And is poised to become one of the biggest winners of the global 5G upgrade cycle.
Qualcomm’s diversified product portfolio and positive tailwinds will continue to power the stock for several more years. All of its major operating metrics are very strong, and the company has beat expectations in 10 out of the last 12 quarters.
With QCOM stock trading at a discount, there’s more incentive to buy in to this one.
Brooks Automation (BRKS)
Brooks Automation is focused on automation solutions for several purposes and markets. It has two segments, and one is principally engaged in the semiconductor business. Among other products, the Massachusetts company manufactures wafer handling robotics for the semiconductor sector.
In the last five years, the company’s top line has increased 11.4%. According to data tracked by Refinitiv, analysts are forecasting revenue growth of 18.7% and 30.1% in 2021 and 2022, respectively.
Relative to the S&P 500 baseline, BRKS stock has surpassed the S&P 500 by 776.7% and its sector by 626.3% in the last five years. Since its price momentum is excellent at the moment, I would wait for a dip before buying this one.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.