A recent survey of analysts’ reports on makers of semiconductor chips featured four manufacturing stocks to buy.
While the demand for semiconductors skyrocketed last year, it also led to a worldwide chip shortage. Before the pandemic, the US-China trade war disrupted chip supply chains. Then the pandemic made things worse with the initial shutdown of chip manufacturing. The pandemic also resulted in remote learning and a resultant surge in computer sales. This led to a massive spike in demand for chips.
Semiconductors are materials that conduct electricity and are found in many different electronic products. They are an important part of the telecommunications industry—a sector that allows for communication through phones, tablets, and the internet.
The shortage continues to this day and it is affecting many industries, including automobiles and electronics. Auto manufacturers need chips to create cars, so some of the biggest car companies in the world, including General Motors, Ford, Volkswagen and Toyota, have been cutting production. The shortage has also affected video game consoles. The demand for video game consoles has exploded over the past year, and Sony and Microsoft are having a hard time keeping up with demand. The shortage has not gone unnoticed by the White House, which is scrutinizing the supply chain, looking to improve supply.
Just what is a semiconductor? It is a material that partly conducts current. Most semiconductors are crystals that are made up of materials such as silicon. Their conductivity can be altered through impurities, or doping, to meet the needs of an electronic component in which it resides. A transistor is a semiconductor device that is used to amplify electronic signals and electrical power.
Semiconductors are essentially the brains of almost every electronic device you use, such as your computer, smartphone, or watch. Semiconductors, or chips, can be used for memory, graphics or storage. For instance, memory chips serve as a temporary storage of data that passes information to and from parts of a device. Graphics chips help power the graphics from your computer to your monitor.
Semiconductor companies are continually trying to create smaller and faster products so that more power can be placed on each chip. The more transistors that are on a chip, the quicker it can do its work. This gave way to Moore’s law, which states that the number of transistors in a microchip will double roughly every two years. Not every company in the semiconductor industry designs and makes them. Some only design them, while others do the actual manufacturing. Other companies create the machinery to manufacture them. A highly arbitrary survey of semi companies and their stocks’ prospects follows.
Applied Materials Inc. (NASDAQ—AMAT)
Applied Materials is the leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world. The company says that it sees “broad-based strength” across its semiconductor-equipment businesses, noting that secular trends signal “sustainable demand” for semi-conductors, ranging from phones to servers to cars. Consensus analyst estimates for Applied continue to rise, with the consensus now projecting 59 per cent higher earnings per share for fiscal 2021 ending October on revenue growth of 32 per cent. The 25 analysts offering 12-month price forecasts for Applied Materials Inc have a median target of $162.10, with a high estimate of $195.00 and a low estimate of $125.00.
Morgan Stanley analyst Joseph Moore says that tight supply conditions resulted in stronger near-term spending conditions, helping Applied Materials outperform peers in the quarter. While the company guided to continued wafer fab equipment (WFE) growth through 2022, Morgan Stanley sees plateauing ahead in the second half of 2021, the analyst said. Applied Materials stock is trading at the midpoint of a roughly 30-point trading range in the last few months, Moore said, adding that the stock is likely to remain in that range.
While the stock is a core holding, there is likely to be a lower fundamental bar elsewhere, with the company giving two years’ worth of guidance, the analyst said. Mr. Moore maintained an equal-weight rating on Applied Materials shares and increased the price target from $137 to $139. He reiterated the firm’s Buy rating. Elsewhere, Credit Suisse analyst John Pitzer reiterated an Outperform rating and $175 price target, while Needham analyst Quinn Bolton reiterated a Buy rating and $153 price target. Applied Materials is Needham’s top semi pick.
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE—TSM)
Founded in 1987 and based in Hsinchu, Taiwan, TSM built the world’s first semiconductor foundry. TSM’s share price increased by 86 per cent in 2020, and the company’s shares are up another 15 per cent in 2021 year-to-date. TSM raised its five-year revenue CAGR from 5-10 per cent earlier to the 10-15 per cent range (2020-2025 period). The stock hit its all time high of $142.00 in February.
Established companies like Apple, Advanced Micro Devices, Nvidia and Qualcomm rely on TSM for their semiconductor supplies. The company’s solid financials indicate a stock rebound in the near term. Its revenue increased 16 per cent year-over-year to $12.9 billion for the first quarter ended March 31, 2021. Its net income also increased 19 per cent year-over-year. The stock has gained 380 per cent over the past five years and 220 per cent over the past three years. While price targets include a high of $200.00, the average price target is $145.00. TSM is a Buy.
Analysts expect TSM’s revenue to increase by 25 per cent for the quarter ending June 30, 17 per cent for the quarter ending September 30, and 22 per cent in fiscal year 2021. With its strong market dominance and large production capacity, TSM is in an excellent position to capitalize on strong worldwide demand for chips. With its strong financials and demand that is expected to be driven by artificial intelligence and electric vehicles, TSM is looking highly attractive.
Intel Corporation (NASDAQ—INTC)
Under the leadership of the late Andy Grove (“Success breeds complacency. Complacency breeds failure. Only the paranoid survive.”), Intel practically became synonymous with semiconductors. While the company is no longer the standard bearer for the chip industry, it is still a major player and the US’s last hope for regaining industry leadership.
If there are industry downbeats out there, don’t count the current CEO among them. “I see 10 years of good growth” in the semiconductor industry,” said Pat Gelsinger recently. In response to the increase in demand for semiconductors, Intel is investing aggressively in chip production capacity, which the company believes will be used even after the current global microchip shortage abates. Gelsinger, who became CEO in February, says: “This is a pivotal year for Intel. We are setting our strategic foundation and investing to accelerate our trajectory and capitalize on the explosive growth in semiconductors that power our increasingly digital world.” While there is no guarantee that the company can catch up with and even surpass the chip foundry leader, Taiwan Semiconductor, the company certainly plans to make an effort and is prepared to make the necessary investments.
Most observers like the company and see a smooth road ahead. Notes one analyst: “Intel stock seems undervalued by several metrics, which is understandable given the company’s struggles over the last few years and the expectation of many investors that it would be better for the company to outsource production rather than struggle to hold on to its own semiconductor fabrication capacity. But given the expected decade of growth and demand predicted to reach a compounded annual growth rate of six per cent or more through 2025, Intel is in a good position to regain its leadership.” While its goal is to win the number one spot, it should at least be able to report strong earnings growth for years to come. According to The Wall Street Journal, thirteen analysts have a Buy rating on the stock, while seven have a Sell rating. The consensus rating is a Hold, while the median price target is $67.00. The high price target is $85.00 while the low is $40.00.
Qualcomm Inc. (NASDAQ—QCOM)
Twenty-eight Wall Street analysts have issued ratings and price targets for Qualcomm in the last 12 months. Their average twelve-month price target is $166.60. The high price target for QCOM is $200.00 and the low price target for QCOM is $125.00. There are currently 11 Hold ratings, 16 Buy ratings and 1 Strong Buy rating for the stock, resulting in a consensus rating of Buy. The Wall Street Journal survey of analysts reveals a consensus rating of Overweight. Analysts expect Qualcomm earnings per share to rise 86 per cent in all of fiscal 2021, according to FactSet Research Systems Inc. The company returned to growth in 2020 after several years of declines. Sales are seen climbing 48 per cent in 2021, to $31.2 billion.
Qualcomm stock has underperformed this year, declining by almost 10 per cent since early January, on account of the semiconductor shortage and reports that Apple is prepping its own modems. Though it admits that it was not the founder of the 5G standard, Qualcomm is one of the leaders in that market. As one analyst has noted, “We think the stock is undervalued, given Qualcomm’s leadership position in the 5G market, which is poised to expand considerably in the coming years.”
The bullish case for Qualcomm is based on three factors. Qualcomm collects royalty income on 3G, 4G and 5G handsets sold, as it holds virtually all essential patents used in these networks. Secondly, barring legal or regulatory challenges, the company’s royalty revenue should grow along with the smartphone market, even as much of the market growth will come from entry-level phones. Also, Qualcomm is the clear market leader in wireless chips, with a leading market share in 4G and 5G chipsets and its relationships with every prominent smartphone maker. Qualcomm is likely to see higher demand for its 5G chipsets. Moreover, Apple has moved back to using Qualcomm modems in its strong-selling iPhone 12 devices, after leveraging Intel modems in its iPhone 11 series.
This is an edited version of an article that was originally published for subscribers in the July 2021, First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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