Semiconductor stocks have been in the limelight during the ongoing chip shortage, which has been affecting a range of firms, especially in the tech and automotive sectors. Chips have had a significant impact on technology and innovation in the past several decades. Today, we find chips in items ranging from smartphones, to air conditioners, fridges, LED bulbs, rice cookers, TVs and cars, including electric vehicles (EVs). Therefore, today’s article discusses seven stocks that will survive the semiconductor shortage long-term.
Recent research published in the Software Quality Professional highlights, “The semiconductor industry has been a model for innovation over the last couple of decades. The complexity of integrated circuit (IC) designs has increased, and the process to produce them has become more challenging due to variable market demand.”
Most InvestorPlace.com readers are familiar with the fact that the semiconductor sector is mostly based on an outsourced manufacturing model. Put another way, most semiconductor firms design chips in-house that then get manufactured elsewhere. This type of fabrication is commonly referred to as “fab” or “foundry.”
As a cyclical industry, the semiconductor sector goes through periods of booms and busts. Developments in artificial intelligence (AI), the Internet of Things, (IoT), and machine learning will increase the global demand for chips. Analysts concur the surging demand, especially the pandemic, for consumer electronics and EVs have in part contributed to the current shortage. Over the past year, chip shares have been firing on all cylinders. The widely-followed PHLX Semiconductor Sector Index returned about 129% in the past 12 months.
The chip industry is extremely important for our economy. According to a joint report by the Semiconductor Industry Association and the Boston Consulting Group, “The US semiconductor industry has long been the global semiconductor leader, consistently accounting for 45% to 50% of global revenues.” Furthermore, “Growth in global semiconductor demand is projected to require a 56 percent increase in manufacturing over the next 10 years.”
With that information here are seven stocks as semiconductors continue to make the headlines:
- Applied Materials (NASDAQ:AMAT)
- Hyundai Motor Company (OTCMKTS:HYMTF)
- Kulicke & Soffa Industries (NASDAQ:KLIC)
- Microsoft (NASDAQ:MSFT)
- Nvidia (NASDAQ:NVDA)
- Taiwan Semiconductor Manufacturing (NYSE:TSM)
- Texas Instruments (NASDAQ:TXN)
Semiconductors: Applied Materials (AMAT)
52-week range: $46.22 – $146
YTD price change: Up about 66%
Dividend yield: 0.7%
Santa Clara, California-based Applied Materials is one of the largest semiconductor fabrication equipment suppliers based on revenue. In other words, the group makes tools and equipment used in chip manufacturing. The company’s history goes back to 1967.
When foundries need more equipment, they turn to Applied Materials. The company also supplies LCD equipment for the flat panel display industry as well as photovoltaic (PV) technology manufacturing systems for the solar industry.
The company released first-quarter fiscal-year 2021 results on Feb. 18. Revenue was $5.16 billion. On a non-GAAP adjusted basis, Applied Materials reported gross margin of 45.9%, operating income of $1.50 billion, and EPS of $1.39. Cash from operations stood at $1.42 billion, and dividends paid was $201 million.
CEO Gary Dickerson said, “In our first fiscal quarter, we’ve seen a continued acceleration of demand in our semiconductor business as major macro and industry trends fuel increasing consumption of silicon across a wide range of markets and applications.”
AMAT relies on organic growth, therefore the chip shortage is providing tailwinds for the shares, which returned over 238% in the past year. Forward price-to-earnings (P/E) and price-to-sales (P/S) ratios stand at 23.81 and 7.17, respectively. April means a busy earnings season is upon us when many semiconductor stocks report. Any potential decline toward the $130 level or below would improve the margin of safety.
Hyundai Motor Company (HYMTF)
52-week range: $20.29 – $71.00
YTD price change: Up about 12%
Dividend yield: 2.9%
Our next stock comes from the automotive sector, one of the most affected industries during the current semiconductor shortage. Established in 1967, the South Korea-based Hyundai is a leading automobile manufacturer. It also owns a 34% stake in Kia Motors (OTCMKTS:KIMTF). In recent months, to the delight of investors, the company has been putting more resources into EVs.
At the end of January, Hyundai Motor Company announced its financial results for Q4 and full-year 2020. In the fourth-quarter, total sales volume declined by 4.7% year-over-year. Yet, Q4 sales revenue increased by 5.1 % YoY to 29.24 trillion KRW. Net profit grew by a massive 44% as the company recorded 1.38 trillion KRW in profit.
Analysts noted that new models, such as all-new Tucson SUV and Elantra sedan, as well as luxury brands, such as the G80 sedan and GV80 SUV of Genesis, helped boost sales momentum. In 2021, management expects a revenue growth of 14-15%.
In the past year, Hyundai shares returned 129%. The stock’s forward P/E and P/S are 4.21 and 0.15. Despite the run-up in price, the valuation is not frothy. Potential investors could consider buying the dips. I expect the company to increase its market share in the current markets and make progress in its EV penetration.
Kulicke & Soffa Industries (KLIC)
52-week range: $20.10– $56.67
YTD price change: Up about 75%
Dividend yield: 1.1%
Our next company is another semiconductor equipment stock. Singapore-based Kulicke & Soffa Industries provides semiconductor, LED and electronic assembly solutions for a range of industries. It generates most of its revenue from the Asia-Pacific region.
Kulicke & Soffa announced its Q1 2021 results at the beginning of February. Revenue showed a hefty 85.6% YoY increase, climbing to $267.9 million. Net income jumped by 187.2% YoY and reached $53.7 million. Diluted EPS followed a similar pattern and was up by 196.6% to hit 86 cents. Cash and equivalents were $576.7 million at the end of the period.
CEO Fusen Chen stated, “Demand has increased significantly in the December quarter driven by strength in the general semiconductor, LED and automotive markets.” The Company expects total sales revenue in Q2 2021 (ending April 3, 2021) to be approximately $300 million +/- $20 million.
KLIC stock’s price-to-book (P/B) and P/S ratios are 4.27 and 4.69. Finding undervalued growth stocks in the chip space is becoming increasingly difficult. But I expect the company to create shareholder value for many more quarters. Any decline toward $45 would offer a better opportunity to buy into the KLIC share price. Further bullish headlines regarding the semiconductor space will likely provide further momentum for the stock.
52-week range: $162.30 – $249.96
YTD price change: Up about 12%
Dividend yield: 0.9%
Our next company, Microsoft, does not immediately come to mind as a semiconductor stocks. As one of the biggest technology companies of the world, the firm is best known for its Windows operating systems, Office productivity suite and increasingly for Microsoft Azure, its cloud services.
The company has recently announced it would start making its own chips so that it could rely less on Intel’s (NASDAQ:INTC) technology. In November 2020, the company introduced the Microsoft Pluton processor. On another note, co-founded Bill Gates has recently invested in “Luminous, a small start-up building an artificial intelligence chip.”
Management announced Q2 2021 results at the end of January. Revenue increased by 17% YoY to hit $43.1 billion. The biggest revenue driver was the intelligent cloud segment with a hefty 23% YoY increase. Net income rose by 33% YoY and reached $15.5 billion. Diluted EPS also jumped by 34% YoY to $2.03. Cash and equivalents at the end of period stood at $132 billion.
Amy Hood, Microsoft CFO, cited “For FY21, with our strong performance in the first half of the fiscal year and our outlook for Q3, we expect to deliver another full year of double-digit revenue and operating income growth, as well as healthy operating margin expansion even after excluding the impact of the change in accounting estimate and COVID-related savings.”
MSFT stock’s forward P/E and P/S are 30.86 and 12.42. In recent days, the company made the headlines when it announced that it has secured a massive Pentagon contract worth over $20 billion. Investors were delighted. Over the past 12 months, the shares have returned 61%. Given Microsoft’s resources and agility, we can expect the company to make inroads in chip manufacturing in the coming quarters. With this new initiative under its belt too, the company is likely to increase shareholder value throughout the rest of the year.
52-week range: $257 – $614.90
YTD price change: Up about 6%
Dividend yield: 0.1%
With a market capitalization (cap) of about $343 billion, the Santa Clara, California-based Nvidia is one of the most important chip companies. It focuses on personal computer (PC) graphics, graphics processing units (GPU) and AI. Nvidia is well-known for its GPU chips and Tegra Processors. Its GPU product brands are aimed at specialized markets, including GeForce for gamers, Quadro for designers, Tesla and DGX for AI data scientists and big data researchers, and GRID for cloud-based visual computing users.
In late February, the company announced Q4 and full-year results. The record quarterly revenue of $5 billion meant an increase of 61% YoY and 6% sequentially. Non-GAAP EPS was $3.10, up 64% YoY and 7% sequentially. Nvidia reports revenue in four segments:
- Data Center (Q4 revenue was a record $1.9 billion)
- Gaming (Q4 revenue was a record $2.5 billion)
- Professional Visualization (Q4 revenue was $307 million)
- Automotive (Q4 revenue was $145 million)
In the past 12 months, NVDA stock is up about 116%. As a result, forward P/E and P/S ratios of 41.32 and 20.81 point to a frothy valuation. Coupled with sectoral volatility and rising Treasury yields, short-term profit-taking in the shares is likely. Buy-and-hold investors could regard any move toward the $500 level as a better entry point. In the long-run, Nvidia’s fast-growing top and bottom lines will lead to new record-highs in the share price.
Taiwan Semiconductor Manufacturing (TSM)
52-week range: $47.72 – $142.20
YTD price change: Up about 12%
Dividend yield: 1.4%
Taiwan-based Taiwan Semiconductor Manufacturing is the world’s largest semiconductor foundry. It is highly regarded for its semiconductor process technology, and currently serves over 500 customers worldwide. The company dominates the fab side of the semiconductor space.
In mid-January, TSM announced Q4 fiscal year 2020 results. Consolidated revenue showed an increase of 14% YoY. Net income was also up 23% YoY. Diluted EPS was $0.97 per ADR unit, increasing 23% YoY.
Wendell Huang, VP and Chief Financial Officer, cited, “Moving into first quarter 2021, we expect our business to be supported by HPC-related demand, recovery in the automotive segment, and a milder smartphone seasonality than in recent years.”
In the past 52 weeks, TSM stock is up close to 160%. Forward P/E and P/S ratios are 32.79 and 13.74, respectively. The company is expected to release Q1 results in the coming days. Potential investors might want to analyze the metrics and wait for a potential pull-back in the share price. A decline toward the $110 level would improve the margin of safety. The global chip shortage should mean strong demand for the company.
Texas Instruments (TXN)
52-week range: $105.30 – $197.58
YTD price change: Up about 19%
Dividend yield: 2.1%
For our next stock, Texas Instruments, we go from Taiwan to Dallas, Texas. The company focuses on analog chips and embedded processors. With 14 manufacturing sites worldwide, the chip group provides 80,000 products for over 100,000 customers, which mostly come from the consumer electronics, automotive and industrial markets.
TXN announced Q4 and full-year results in late January. Revenue was $4.08 billion, an increase of 22% YoY. Net income came at $1.69 billion, up 58% YoY. EPS of $1.80 also meant an increase of 61% YoY. Free cash flow during the quarter was $1.9 billion. Analysts concurred that it was a robust quarter for the group.
CEO Rich Templeton commented, “Together, our dividends and stock repurchases reflect our continued commitment to return all free cash flow to our owners. TI’s first quarter outlook is for revenue in the range of $3.79 billion to $4.11 billion and earnings per share between $1.44 and $1.66.”
In the past year, TXN shares returned over 85%. The stock’s forward P/E and P/S ratios are 30.03 and 12.71 respectively. Buy-and-hold investors could consider an investment around $180 or below. During April, the shares should be under the radar.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.