One of the biggest stories that investors should be monitoring right now is the unprecedented shortage of semiconductors. The shortage is directly related to the pandemic and how it has affected the supply chains for these chips that are used in everything from video game consoles to automobiles. Many semiconductor factories in China and around the world were closed for a large portion of 2020 to slow the spread of the virus. Then, the global demand for electronics such as televisions, smartphones, and laptop computers spiked sharply while consumers stayed home for the majority of the year and adapted to remote work.
The impact of the shortage is widespread and might continue for a large portion of the year, even with chipmakers operating at maximum capacity. That’s why it might pay off to start thinking about which companies are in the best position to benefit from the current chip shortage and consider adding them to your portfolio. Even if the current circumstances only lead to a short-term demand increase, each one of these semi stocks is still poised to become long-term winners. Let’s take a deeper look below.
Taiwan Semiconductor Manufacturing (NYSE:TSM)
If there’s one company that is set to come out a big winner of the semiconductor shortage, it’s Taiwan Semiconductor Manufacturing. As the world’s largest dedicated contract chip manufacturer, many of the biggest semi companies in the world rely on TSMC to manufacture their products. That includes names like Apple, Broadcom, NVIDIA, and Advanced Micro Devices. The company’s cutting-edge process technologies have helped it gain an estimated 56% of market share in the foundry industry as of Q4 2020. That means the company will be very busy trying to keep up with the huge demand for chips in 2021 and beyond.
The stock has already delivered strong gains in 2021 and is up 22.3% year-to-date. TSMC has also consistently been delivering earnings growth and recently reported year-over-year diluted EPS growth of 23% in Q4. TSMC expects to spend over $25 billion on facility upgrades in 2021 which could pay off in a big way over the years, even after the shortage is taken care of. The company is so determined to build new manufacturing facilities to keep up with the massive demand that it is reportedly offering its construction workers double the average daily wage to keep up the pace during the Lunar New Year holiday period.
Whenever the major chipmakers need semiconductor manufacturing equipment, services, and software, Applied Materials is usually the company to supply it to them. As the world’s largest manufacturer of wafer fabrication equipment, this is a stock that should benefit from the current macro and industry trends that are increasing the consumption of silicon. With products and services to optimize and increase productivity at semiconductor fabrication facilities, equipment for creating liquid crystal displays that are used in the most popular technology today, and the company’s silicon systems group, Applied Materials is set to play a crucial role in dealing with the current chip shortage.
Take one look at the company’s Q1 2021 earnings report and it’s easy to see the company is benefitting from the acceleration in demand for chips. Applied Materials reported record quarterly revenue in Q1 of $5.16 billion, which represents a 24% year-over-year increase. The 27% year-over-year jump in GAAP EPS to $1.22 was also quite impressive. This company is in a very strong position to grow in 2021 thanks to its broad portfolio of semiconductor capital equipment that will help companies like Intel and Taiwan Semiconductor to increase their production capabilities when they need it the most.
Another potentially big winner of the semi shortage is Lam Research Corp, a company that is a supplier of wafer fabrication equipment and services for the industry. Similar to Applied Materials, Lam Research is a major vendor of the tools that are critical to the chipmaking process. It’s the leader of dry etch, which is a very important step in manufacturing semiconductors that involves precisely removing material with high-tech equipment. Most of the advanced chips today are built with Lam technology and the company’s customers include some of the largest chipmakers in the world including Samsung and the aforementioned Taiwan Semiconductor.
Lam Research recently delivered stellar earnings numbers in Q2 including 34% year-over-year revenue growth and Non-GAAP EPS growth of 50% to $6.03. Investors should anticipate factors like the rise of cloud data centers and 5G smartphones to provide ample opportunities for the company even after the chip shortage subsides. It’s also worth noting that Lam increased its dividend payout by 13% in 2020 and recently announced a $5 billion share buyback program, making this one of the highest-quality stocks in the semiconductor space.
Before you consider Taiwan Semiconductor Manufacturing, you'll want to hear this.
MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Taiwan Semiconductor Manufacturing wasn't on the list.
While Taiwan Semiconductor Manufacturing currently has a "Moderate Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.
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