The Best Chip Plays Behind the Semiconductor Supply Crunch

The global shortage of semiconductor chips needed to power a wide variety of electronics used in everything from automobiles and home appliances to smartphones and personal computers is still causing big headaches.

Close-up electronic circuit board. technology style concept. representing semiconductor stocks
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Overall automobile sales have rebounded to pre-pandemic levels during the first half of 2021, with 8.3 million vehicles sold through June, or about 95,000 shy of the same timeframe in 2019, the Wall Street Journal said.

But J.D. Power has found sales of commercial vehicles still lag. About 14% of overall vehicles were sold to commercial fleets so far this year, compared to 22% in 2019. That amounts to about 695,000 fewer commercial vehicles sold.

The lack of supply has ramped up competition among small businesses that rely on fleets of commercial vehicles like pickup trucks and cargo vans to maintain and grow their operations. Now, they’re paying elevated prices for new or used commercial vehicles, if they can find them at all, the Wall Street Journal reports.

A somewhat similar situation is playing out for personal computer sales.

IDC and Gartner recently said after a sales surge caused by the pandemic last year, the global chip shortage is slowing the growth rate in demand for new personal computers this year. Sales of personal computers reached 83.6 million units in the second quarter, up 13.2% from a year prior. The growth rate has cooled somewhat since the 55.9% growth in sales during the first quarter and 25.8% growth in the fourth quarter of 2020.

But the enterprise market for computers was more impacted by the chip shortage than the consumer market because vendors can be more flexible in designing and sourcing parts for consumer models.

Gartner said businesses seeking to purchase enterprise mobile PC models now can wait as long as 120 days. The firm predicts rising prices could further cool demand over the next six to 12 months.

Interestingly, the chip shortage is even causing businesses to reach out in desperation to unscrupulous actors selling bunk products, while purchases of costly x-ray machines that companies use to detect fraudulent or defective chips have soared.

Now, one great way to play the chip shortage is to look for fundamentally superior stocks poised to use the situation to their advantage.

Case in point: Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM), the world’s largest contract chipmaker.

The company brought in 57% of the world’s chip foundry revenues during the first quarter, which also marked a record high $22.8 billion in sales to the world’s 10 largest chipmakers overall, TrendForce said. And analysts at TrendForce expect revenues will climb even higher — from 1% to 3% — during the second quarter.

Last Friday, Taiwan Semiconductor said its sales in June climbed 22.8%, year-over-year, and 32.1% higher than May to about $5.4 billion. Year-to-date, sales have risen 18.2% from the year prior, boosted by the chip demand from automotive and other sectors, including smartphones.

On Thursday, the company released results for its second quarter in fiscal year 2021. Second-quarter revenue rose 19.8% year-over-year to NT$372.15 billion, while earnings grew 11.2% year-over-year to NT$134.36 billion, or NT$5.18 per share.

In U.S. dollar terms, Taiwan Semiconductor achieved earnings of $0.93 per ADR, in line with the consensus estimate, and revenue of $13.29 billion. That represented 19.2% year-over-year earnings growth and 28% year-over-year revenue growth.

Company management noted that it saw strong demand for its semiconductors in the HPC and automotive markets — and this demand is expected to remain robust going forward. As a result, Taiwan Semiconductor is anticipated to increase production by 60% this year and achieve 20% annual revenue growth.

For the third quarter, Taiwan Semiconductor expects revenue between $14.6 billion and $14.9 billion, which compares to revenue of $12.14 billion in the third quarter of 2020. This forecast is also slightly higher than the current consensus estimate that calls for $14.44 billion.

The stock dipped 5% Thursday, falling along with the broader market, but it’s important to keep in mind that the company remains a dominate player in the semiconductor space and given the positive future guidance, I look for the stock to bounce back after investors digest the numbers.

Over the past year, the stock has soared 78%. That’s well ahead of the industry benchmark, the iShares PHLX Semiconductor ETF (NASDAQ:SOXX), which has climbed 56% over the same timeframe.

I recommended the stock to my Growth Investor subscribers back in November 2020, and the stock is currently among my Top 5 recommendations on the Growth Investor Buy List.

And it’s not the only semiconductor company I like right now. In fact, there are several others on my Growth Investor Buy Lists that are perfectly positioned to benefit from the recent chip shortage. They’re also filled with fundamentally superior stocks in several of the most explosive sectors of the economy, like internet technology, semiconductors, artificial intelligence (AI) and healthcare. So, my Growth Investor Buy List represents the crème de la crème of growth stocks with strong sales and earnings.

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Sincerely,

Louis Navellier

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Note: The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owned the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

Taiwan Semiconductor Manufacturing Company Limited (TSM)

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