Invest in these stocks to profit from strong demand for chips.
It’s not just the makers of laptops and other consumer electronics that have been facing headwinds from the global semiconductor shortage. Automobile manufacturers have also been a high-profile victim, and the dearth of chips has hit makers of appliances connected to the “internet of things,” among other industries. The demand for chips has increased as the coronavirus pandemic eases, but supply hasn’t caught up. So prices have been rising, and that helps chipmakers. “Cars and phones are costing more because of this single product supply crunch,” says Kunal Sawhney, CEO of Kalkine Group, adding that the “trajectory of semiconductor stocks will be upward in the near to medium term.” With that backdrop of strong supply-and-demand fundamentals, here are seven semiconductor stocks that experts point to as top picks.
Broadcom Inc. (ticker: AVGO)
Broadcom designs and supplies semiconductors and infrastructure software. In its September quarterly report, the company said its revenue rose 16% year on year, while its net income more than doubled. “Broadcom delivered record revenues in the third quarter, reflecting our product and technology leadership across multiple secular growth markets in cloud, 5G infrastructure, broadband and wireless,” CEO Hock Tan said in a press release accompanying the numbers. Allen Thuma, portfolio manager and research analyst with Buckingham Advisors, says Broadcom is benefiting from the move into 5G smartphones — amid a shift to the phasing out of 3G — and has other business segments that provide diversification, strong cash flows and a favorable margin profile.
Qualcomm Inc. (QCOM)
This company makes chips for cell phones and is a supplier to Apple Inc. (AAPL). The iPhone maker said in its most recent quarterly results conference call that supply constraints cost it $6 billion in revenue “driven primarily by industrywide silicon shortages and COVID-related manufacturing disruptions.” Despite that, Qualcomm beat earnings and revenue estimates in its most recent results and issued robust guidance for this quarter. Nancy Tengler, chief investment officer at Laffer Tengler Investments, says the “company is in the sweet spot of 5G build-out.” Qualcomm “has a leading position in the mobile handset market and should get a boost from the ongoing 5G upgrade cycle,” says Anthony Minopoli, chief investment officer with Knights of Columbus Asset Advisors.
Applied Materials Inc. (AMAT)
As a wafer fabrication equipment manufacturer, Applied Materials “directly benefits from the large amount of global pent-up chip demand,” says Thuma. The company “stands to benefit from many long-term semiconductor high-growth trends such as 5G, artificial intelligence, cloud computing, autonomous driving and [the] internet of things because their complex equipment can be used for making any type of chip,” Thuma says. In its most recent quarter, Applied Materials reported record quarterly revenue of $6.2 billion, marking a year-on-year gain of more than 40%. “Applied Materials delivered record performance as long-term trends fueled by the digital transformation of the economy drive strong, secular demand for semiconductors,” CEO Gary Dickerson said in a press release accompanying the earnings.
Taiwan Semiconductor Manufacturing Co. (TSM)
This company is a contract chipmaker, manufacturing semiconductors for other companies such as Apple and Qualcomm. “By choosing not to design, manufacture or market any semiconductor products under its own name, the company ensures that it never competes with its customers,” the company says. The world’s largest semiconductor foundry is a beneficiary of the tight global chip supply, with strong pricing power enabling it to offset increasing input and shipping costs, Minopoli says. The company is increasing its capacity with new fabrication plants in Japan and Arizona amid “strong ongoing demand” from increasing semiconductor use in industries such as automobile manufacturing, 5G, the internet of things and high-performance computing, he says.
Microchip Technology Inc. (MCHP)
Minopoli likes that this semiconductor company makes it a priority to return capital to shareholders in the form of dividends and share repurchases. “The company is positioned to benefit from some of the fastest-growing semiconductor market segments, driven by artificial intelligence, self-driving vehicles and broad-based device connectivity,” he says. “Indeed, long-range financial plans call for revenue growth of 6% to 8%, or twice that of the overall semiconductor market.” Minopoli thinks the company “could maintain a mid-teens average growth rate over the next several years as key end markets expand.”
ON Semiconductor Corp. (ON)
This company designs, manufactures and markets semiconductor components for the automotive, consumer, computing, industrial, communications, medical and aerospace-defense markets. Its products reduce circuit board space and improve energy efficiency and reliability, notes Minopoli. “On the top line, the company should benefit from strong fundamental support and accelerating demand for the underlying business as semiconductors proliferate into an ever-wider array of items,” he says. “The bottom line should benefit disproportionately as ON continues to execute on its efficiency improvement/cost reduction program.” According to a U.S. News analysis, the company already has above-average operating margins, and gross margins may continue improving amid what Minopoli describes as a “combination of strong pricing environment and structural changes in the overall business, including manufacturing consolidation, portfolio optimization and improved product mix.”
Nvidia Corp. (NVDA)
This chip stock is a “must-own semiconductor name for any tech- or growth-oriented investor,” Minopoli says. Nvidia is a leader in high-growth gaming and data center markets, and it makes chips used in cryptocurrency mining. According to Minopoli, Nvidia “sits at the crossroads of a number of key secular growth trends” including gaming, artificial intelligence, data center computing and autonomous driving. “While the stock is not cheap on any valuation metric, we believe Nvidia will continue its momentum in the gaming and data center markets and is extremely well-positioned to capitalize on … key secular growth trends.”
Add these seven stocks to capitalize on the semiconductor chip crunch.
— Broadcom Inc. (AVGO)
— Qualcomm Inc. (QCOM)
— Applied Materials Inc. (AMAT)
— Taiwan Semiconductor Manufacturing Co. (TSM)
— Microchip Technology Inc. (MCHP)
— ON Semiconductor Corp. (ON)
— Nvidia Corp. (NVDA)
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Update 11/15/21: This story was published at an earlier date and has been updated with new information.