Strong demand for electronics fueled unprecedented shortages of semiconductors. And the novel coronavirus pandemic has played a part.
When the pandemic started more than over a year ago, companies re-positioned workers to stay at home. That increased sales of computers, which led to shortages in semiconductors. And in other industries like automotive, increased demand for chip components is pressuring the sector. ]
Meanwhile, the advent of 5G ushers an era of low latency. Besides the connected vehicle, automakers added more safety features, infotainment, and other functions that need more computer chips.
For months, experts identified the global semiconductor shortage. Companies that rely on them have to cut production until supplies increase. That could take a few quarters, at least. Investors have seven stocks to buy until the semiconductor shortage ceases. The companies, in alphabetical order, are:
- Applied Materials (NASDAQ:AMAT)
- Broadcom (NASDAQ:AVGO)
- Intel (NASDAQ:INTC)
- Micron Technology (NASDAQ:MU)
- NVIDIA (NASDAQ:NVDA)
- Qualcomm (NASDAQ:QCOM)
- Taiwan Semiconductor (NYSE:TSM)
In the table, for all of the semiconductors, investors may consider buying sore a 79/100 or higher overall. The average score is 85.
Nvidia and Taiwan Semiconductor score the lowest on value but make up for that with an exceptionally strong growth scores. Investors are willing to pay more for both stocks. The shortage will lift their profit margins, which is a tailwind for the stock.
Semiconductors: Applied Materials (AMAT)
Applied highlighted five key takeaways at an investor presentation. The artificial intelligence era will lead to secular growth and a push for innovation. It sees itself as a performance, area, cost, and time to market (PPACt) company. The new PPACt playbook will benefit customers and partners as it delivers a portfolio of innovative products to market.
Investors should expect visible revenue in the quarters ahead. Applied will shift more of its business to a subscription-style revenue model. On the balance sheet, the business growth will result in better free cash flow.
Applied is operating on the forecast that earnings per share will exceed revenue growth by a multiple of 1.7 times to 2 times.
AMAT stock already rose steadily, reflecting the digital transformation phase lifting growth for years to come. And in this data-centric world, automation, AI, and the industrial Internet of Things will only increase demand.
Stuck mostly in a trading range, Broadcom is poised to break out. On its Q1/2021 conference call, Chief Executive Officer Hock Tan highlighted the strong backlog. He said that it is stretching its lead times. Customers are responding by pushing orders further out.
AVGO could manage its supply and demand balances better. But with revenue growing by 17% year-on-year, it may enjoy the 90% bookings for 2021. Bookings grew by 63%, so instead of increasing supply, it will better communicate the next generation products to customers. That will help customers ease orders, balance the need for getting products sooner or waiting for improved ones later.
The strong growth in the wireless market is another tailwind for AVGO stock. So, instead of trying to meet the strong demand, the company is extending the product lead time. Customers will continue to book orders based on the demand they are seeing. Broadcom benefits from keeping its booking levels elevated while management mobile chip development activities.
Semiconductors: Intel (INTC)
Intel, seen as the laggard in the PC chip space, showed no evidence of weakness when it reported first-quarter results. Revenue fell slightly by 0.7% YoY to $19.7 billion. It earned $1.39 a share on a non-GAAP basis.
The chip giant raised its full-year 2021 guidance. It now expects revenue will top $77 billion. GAAP EPS will be $4. For the second quarter, revenue will meet consensus estimates at $17.8 billion.
Mobileye is proving a smart acquisition. Revenue rose by 48% to $377 million (per page 2). Conversely, the data center group posted revenue of $5.6 billion, down 20% YoY. EPYC’s powerful server product from Advanced Micro Devices (NASDAQ:AMD) is a headwind for the unit. Still, the consumer computer division is Intel’s biggest revenue generator. The unit benefited from strong demand of 2-in-1, thin-and-light, commercial and gaming, and connectivity and graphics.
Intel is the cheapest semiconductor stock in the over-valued sector. Investors could buy INTC stock as it corrects again. When it announces a CPU refresh, ending the many months of delays, the stock will move higher.
Micron Technology (MU)
Micron Technology traded in a wide range for much of 2021. MU stock has a good chance of breaking out and resuming an uptrend due to the chip shortage.
On the Q2/2021 conference call, CEO Sanjay Mehrotra said that the DRAM market is in severe shortage. The NAND market, however, is stabilizing in the near term. The CEO has plans for managing the macro tailwinds from the non-memory component shortages in the electronics industry. It is enhancing the production process. For example, it will secure alternative sources of water while conserving water usage.
Micron does not expect to have any DRAM production output problems. In the last quarter, the company managed to deliver record PC DRAM bit shipments. Sampling the latest DDR4 products should lift margins in the quarters ahead.
Micron will not raise capital expenditures by much despite the shortage across all end markets and the demand there. This is the safest approach. Instead of facing future risks of a supply glut following the end of the chip shortage, Micron will sell products and keep DRAM in short supply.
Semiconductors: Nvidia (NVDA)
Nvidia said that its first quarter will track above its outlook. It now expects Q1 revenue of above the $5.3 billion outlook. Executive Vice President and Chief Financial Officer Colette Kress said the company is “experiencing broad-based strength, with all our market platforms driving upside to our initial outlook.”
Data center will boost results again this year. Industries continue to use more AI in their products and services. The chip shortage is not a headwind for Nvidia. Investors may shield themselves from the industry imbalance by holding NVDA stock throughout this year.
Nvidia’s EGX enterprise platform is another tailwind. To capitalize on strong demand in the data center, cloud, and the edge, Nvidia’s end-to-end platform will gain from exposure to all growth markets. They are data center AI, edge AI, data analytics, professional visualization, and omniverse.
Nvidia’s 2023 launch of a CPU named Grace is a positive catalyst. This is the company’s first data-center CPU. While the product may face heavy competition from Intel and AMD, it will complement Nvidia’s GPU and data processing unit products.
Qualcomm shares stalled in recent weeks when markets worried about the end of the cycle for semiconductors. This bearishness is short-sighted.
Qualcomm is in the early innings of benefiting from the 5G super cycle. It also has opportunities in the explosive growth of IoT and connected mobility (connected car). In March, the chip giant announced the launch of Snapdragon 780G. This will add powerful AI performance and better camera capabilities for smartphone devices. The product refresh reaffirms Qualcomm’s strength in the 5G handset market. 5G adoption is a long-term opportunity.
The company forecast shipments of 3.8 billion between 2020-2024 (per slide 9). Investors should consider this as a conservative forecast. Mobile technology is converging, driven by the digital economy. 5G is a key player in the ongoing shift to mobile.
On Wall Street, the average price target is around $170 (according to Tipranks). QCOM stock trades at a price-to-earnings in the low 20s and is attractive here.
Semiconductors: Taiwan Semiconductor (TSM)
Taiwan Semiconductor is proactively growing its market share in light of the chip shortage. It is expanding the capacity of mature process technology. The company’s bet that the supply shortage will pay off until at least year-end 2022.
Taiwan Semiconductor allocated $2.89 billion for the capacity expansion. Tight foundry capacity is disrupting the integrated circuit designers. TSM may increase revenue by increasing output to take advantage of the higher materials and fab services costs.
TSM will expand its capacity for the 28nm process at its China fab. The investment is small because excess demand for the mature technology process will not last long. Demand for 7nm to 14nm, for example, will rise steadily. So, TSM will maximize profits by address strong demand across the different levels of manufacturing processes.
Wall Street is cautious on TSM stock. The average price target is $83, according to Tipranks.
Disclosure: 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.