Who knew that something so tiny could create such a big problem? However, that’s the case with the semiconductor industry. Chip manufacturers are facing supply chain disruptions due to the Covid-19 pandemic.
Semiconductors are in high demand for the big tech companies who need the chips to power the servers for their data centers. But they are also needed for much of the technology we take for granted including laptops, tablets, mobile phones, gaming consoles, and automobiles – a sector that seems to be at the root of the current crisis.
Any weekend mechanic knows that even traditional internal combustion cars are heavily reliant on electronics. In fact, electronic parts and components account for 40% of a new, internal combustion vehicle. That’s more than doubled since 2000.
However as it turns out, some manufacturers may have overestimated how soon consumers would be ready for an “all-electric” future. And that meant that they didn’t forecast how much demand there would be for the kind of chips needed to do the mundane, but vital tasks of steering, braking, and even powering windows up and down.
Part of the problem is that U.S. businesses are heavily reliant on countries like China and Taiwan for their semiconductors. In fact, only about 12.5% of semiconductor manufacturing is done in the United States.
Of course, this creates a tremendous opportunity for the companies that manufacture these chips. And it comes at a good time. The semiconductor sector is notoriously cyclical and was coming down from the elevated demand for the 5G buildout.
In this special presentation, we’ll give you a list of seven semiconductor companies that you can invest in to take advantage of this opportunity.
Quick Links
- Taiwan Semiconductor Manufacturing
- Texas Instruments
- Teradyne
- ASML Holding
- Lam Research
- Renesas Electronics
- Applied Materials
#1 - Taiwan Semiconductor Manufacturing (NYSE:TSM)
The first stock on the list is an obvious choice. Taiwan Semiconductor Manufacturing (NYSE:TSM) is the world’s largest contract chipmaker. At some point, the United States will have to break away from its reliance on semiconductors from China and Taiwan. But that’s a longer-term issue. In the short-term, Taiwan Semiconductor will undoubtedly have a role to play in breaking the current supply shortage.
In fact, the company is planning a $28 billion capital expenditure this year to meet the forecast demand. This includes $12 billion to build a plant in Arizona. That announcement sent the TSM stock price down as the company will have to contend with recently rising rates. But that should be a momentary bump in the road. The company continues to show strong growth. In its most recent quarter, the company reported Non-GAAP EPS growth of nearly 25%. And despite the recent dip, TSM stock is still up 15% in 2021.
About Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing Company Limited, together with its subsidiaries, manufactures, packages, tests, and sells integrated circuits and other semiconductor devices in Taiwan, China, Europe, the Middle East, Africa, Japan, the United States, and internationally. It provides a range of wafer fabrication processes, including processes to manufacture complementary metal- oxide-semiconductor (CMOS) logic, mixed-signal, radio frequency, embedded memory, bipolar CMOS mixed-signal, and others.
Read More - Current Price
- $190.65
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 4 Buy Ratings, 1 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $214.00 (12.2% Upside)
#2 - Texas Instruments (NASDAQ:TXN)
The automotive sector is one sector suffering from a disrupted supply chain. That is just one of the sectors serviced by Texas Instruments (NASDAQ:TXN). The company is best known as “the calculator company.” But it’s far more than that. Texas Instruments has a market cap of just over $160 billion as of this writing.
If you believe in the axiom that share price follows earnings (and you should), then you will want to pay attention to TXN stock. The company has delivered an average of 18% earnings per share (EPS) growth over the last three years. So it shouldn’t be a huge surprise that TXN stock is up over 55% in that same time period. And the stock is up so far about 8% in 2021.
And for those investors who like to buy companies that have a high amount of insider buying, Texas Instruments checks that box as well. Insiders have a stake in the company that is worth over $200 million.
About Texas Instruments
Texas Instruments Incorporated designs, manufactures, and sells semiconductors to electronics designers and manufacturers in the United States and internationally. The company operates through Analog and Embedded Processing segments. The Analog segment offers power products to manage power requirements across various voltage levels, including battery-management solutions, DC/DC switching regulators, AC/DC and isolated controllers and converters, power switches, linear regulators, voltage references, and lighting products.
Read More - Current Price
- $197.86
- Consensus Rating
- Hold
- Ratings Breakdown
- 9 Buy Ratings, 11 Hold Ratings, 3 Sell Ratings.
- Consensus Price Target
- $206.95 (4.6% Upside)
#3 - Teradyne (NASDAQ:TER)
Moving away from traditional chip companies, it’s important to look at other areas of the supply chain. The first company to look at in that regard is Teradyne (NASDAQ:TER). The company plays a vital role in providing testing solutions for electronics, such as semiconductors. In fact, testing accounted for over 70% of the company’s fourth-quarter revenue.
As global demand for chips continues to stay high, it’s logical that Teradyne will generate significant revenue gains. This is on top of the recent year-over-year gains the company reported in its most recent earnings report. Teradyne came in with revenue that was 16% above the same period for the prior year and Non-GAAP EPS was also strong showing a 25% YOY gain.
For the full year, revenue grew 36% and EPS increased 65%. This growth is reflected in the company’s stock price which has posted a gain of over 100% in the last 12 months.
About Teradyne
Teradyne, Inc designs, develops, manufactures, and sells automated test systems and robotics products worldwide. It operates through four segments; Semiconductor Test, System Test, Robotics, and Wireless Test. The Semiconductor Test segment offers products and services for wafer level and device package testing of semiconductor devices in automotive, industrial, communications, consumer, smartphones, cloud, computer and electronic game, and other applications.
Read More - Current Price
- $105.24
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 8 Buy Ratings, 5 Hold Ratings, 1 Sell Ratings.
- Consensus Price Target
- $142.62 (35.5% Upside)
#4 - ASML Holding (NASDAQ:ASML)
As I mentioned in the introduction, semiconductors are a notoriously cyclical business. ASML Holding (NASDAQ:ASML) has been on the leading edge of this surge in demand. 2018 was a bad year for chip stocks, but demand began to resurge in 2019. And with the onset of the pandemic, whispers began about a potential chip shortage.
ASML Holding builds equipment that fabricates semiconductors. Taiwan Semiconductor Manufacturing is one of ASML Holding’s largest customers. Additionally, ASML has a near-monopoly in the sub-sector of chip lithography. This is the printing of patterns onto silicon.
It stands to reason that the company is likely to have a strong catalyst as demand for chips continues throughout 2021. Investors seem to agree. ASML stock is up over 100% in the last 12 months and is up 15% in 2021. The company’s fourth-quarter earnings came in above expectations, and the company also announced a 15% increase in its dividend.
About ASML
ASML Holding N.V. develops, produces, markets, sells, and services advanced semiconductor equipment systems for chipmakers. It offers advanced semiconductor equipment systems, including lithography, metrology, and inspection systems. The company also provides extreme ultraviolet lithography systems; and deep ultraviolet lithography systems comprising immersion and dry lithography solutions to manufacture various range of semiconductor nodes and technologies.
Read More - Current Price
- $670.02
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 11 Buy Ratings, 3 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $970.60 (44.9% Upside)
#5 - Lam Research (NASDAQ:LRCX)
If you’re looking for a different way to play the chip shortage, consider an investment in Lam Research (NASDAQ:LRCX). The company is an integral part of the semiconductor supply chain. Specifically, it makes the equipment that makes semiconductor wafers.
In the 5G rollout, semiconductor stocks moved higher before end-user stocks like Verizon (NYSE:VZ). The same principle is at work here. The company should benefit as semiconductor companies look to ramp up global production. However, Lam is a U.S.-based company that should benefit from what looks like an inevitable shift to onshore fabrication. This would mean it’s very likely that the company will see its revenue from the United States grow from the 4% level it reached in 2020.
The company is leading the industry in a manufacturing process known as dry etch that involves precisely removing material with high-tech equipment.
In the company’s most recent earnings report, it delivered 34% year-over-year revenue growth and 50% Non-GAAP EPS growth. The company also has strong profitability metrics compared to its peers. LRCX stock is up 21% two months into 2021.
About Lam Research
Lam Research Corporation designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits. The company offers ALTUS systems to deposit conformal films for tungsten metallization applications; SABRE electrochemical deposition products for copper interconnect transition that offers copper damascene manufacturing; SOLA ultraviolet thermal processing products for film treatments; and VECTOR plasma-enhanced CVD ALD products.
Read More - Current Price
- $73.05
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 14 Buy Ratings, 6 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $97.03 (32.8% Upside)
#6 - Renesas Electronics (OTCMKTS:RNECY)
For those investors who have a high-risk tolerance, Renesas Electronics (OTCMKTS:RNECY) is an intriguing penny stock bet. This is a small Japanese company that may never be more than a penny stock. Nevertheless, it looks to be well-positioned for the coming surge in chip demand.
One of the differences between Renesas and other stocks in this presentation is that it is largely a play on the EV market. But because the company’s chips are used in virtually every component of the vehicle, this represents a large opportunity. A significant percentage of the company’s revenues comes from the IoT sector. In fact, the two sectors: automotive and IoT have bounced back-and-forth over the last couple of years in terms of providing higher revenue.
RNECY stock is up over 75% in the last 12 months. And the stock is continuing to show strong growth in 2021. In the year-to-date, the stock is up nearly 10%. The company is covered by three analysts and receives two buy ratings and one strong buy rating.
About Renesas Electronics
Renesas Electronics Corporation researches, develops, designs, manufactures, sells, and services semiconductors in Japan, China, rest of Asia, Europe, North America, and internationally. The company operates through Automotive Business and Industrial/Infrastructure/IoT Business segments. It offers microcontrollers (MCUs) and microprocessors; amplifiers, audio and video, data converters, power line communication, and switches and multiplexer products; and specific clocks, clock distribution and generation, jitter attenuators with frequency translation, and crystal oscillator, and VersaClock programmable clocks.
Read More - Current Price
- $6.55
- Consensus Rating
- N/A
- Ratings Breakdown
- 0 Buy Ratings, 0 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- N/A
#7 - Applied Materials (NASDAQ:AMAT)
Lam Research may be a more under-the-radar stock. But the leader in the wafer fabrication equipment is Applied Materials (NASDAQ:AMAT). AMAT stock is up 36% year-to-date. And it’s easy to see why. The company recently reported $5.16 billion in revenue which was a year-over-year increase of 24%. And Applied Materials also posted a 27% increase in GAAP EPS for the same quarter.
In the short term, Applied Materials will benefit from semiconductor companies needing to increase demand. However, this is a research-forward company that is considered to be the brains behind semiconductors. Thirty percent of the company’s employees are in research, and the company invests over $2 billion annually in R&D. This commitment is evident in the company’s library of over 14,000 patents.
This means that the company will be the go-to choice for companies engaged in the ongoing push towards the Internet of Things (IoT) and artificial intelligence (AI) applications.
About Applied Materials
Applied Materials, Inc engages in the provision of manufacturing equipment, services, and software to the semiconductor, display, and related industries. The company operates through three segments: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. The Semiconductor Systems segment develops, manufactures, and sells various manufacturing equipment that is used to fabricate semiconductor chips or integrated circuits.
Read More - Current Price
- $175.34
- Consensus Rating
- Moderate Buy
- Ratings Breakdown
- 15 Buy Ratings, 7 Hold Ratings, 0 Sell Ratings.
- Consensus Price Target
- $219.81 (25.4% Upside)
The chip shortage could potentially cost the automotive industry over $60 billion in revenue in 2021 says the consulting firm, AlixPartners. That estimate covers the entire supply chain from the dealers and automakers down to the smallest suppliers. And this is exactly the kind of slowdown the U.S. is desperately trying to avoid as the economy continues its recovery from the Covid-19 pandemic.
President Biden is pledging to sign an executive order to launch a review of supply chains. The review will go beyond semiconductor chips and include large-capacity batteries, rare earth minerals, and pharmaceuticals. Anonymous sources familiar with the administration’s thinking have said the U.S. may consider a range of actions including financial incentives, tariffs, and/or changes in procurement policies.
However, in late February, General Motors (NYSE: GM) reported that it believes the worst of the company’s global chip shortage may be behind it. And some auto manufacturers such as Toyota are thought to have weathered the shortage better than most.
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