A global shortage of semiconductors has turned the industry upside down. The demand for chips was high even before the pandemic started, due to the rollout of 5G. However, the coronavirus pandemic drove that demand much higher as millions bought laptops, cell phones, and gaming devices as they sheltered in their homes.
While many analysts thought the shortage would get better toward the end of the year as the vaccines rolled out, that may no longer be the case. Apple (NYSE:AAPL) CEO Tim Cook warned that silicon supply constraints would affect sales of the iPhone and iPad. This week Toyota Motor Corp. (NYSE:TM) announced it would reduce global production for September by 40% from its previous plan due to critical shortages of semiconductors.
Since the shortage reflects a tight supply, this has been a boon to the semiconductor industry and many chip stocks. With the shortage expected to continue, many chip stocks are ripe for continued gains. That’s why investors should consider chip stocks such as these, which are rated highly in our POWR Ratings system:
- Intel Corporation (NASDAQ:INTC)
- Silicon Motion Technology Corp. (NASDAQ:SIMO)
- Broadcom Inc. (NASDAQ:AVGO)
Stocks to Buy: Intel Corporation (INTC)
Intel is the world’s largest chipmaker. It designs and manufactures microprocessors for the global personal computer and data center markets. While its server processor business has benefited from the shift to the cloud, the firm has also been expanding into new adjacencies as the personal computer market has stagnated.
This includes major trends such as the Internet of Things, artificial intelligence and automotive. The company has even made a string of acquisitions to build its artificial intelligence and automotive offerings, such as Altera, Mobileye, Habana Labs and Movidius. In fact, in the most recent quarter, both its Internet of Things and Mobileye reported extremely strong performance.
As the remote working wave doesn’t seem to have an end in sight, INTC should benefit from higher demand for its 10 nanometer SuperFin process-based 11th Gen core processors amid continued robust growth in the PC market. Plus, its data center business has a very bright future. As more information is increasingly stored in the cloud, there is demand for a new breed of chips like Intel provides.
The company has an overall grade of A, which translates into a “strong buy” rating in our POWR Ratings system. INTC has a Value Grade of A, which makes sense when considering its forward P/E of only 12.14. Its trailing P/E of 11.71 is even lower. The company also has a Quality Grade of B due to solid fundamentals.
For instance, it had $24.9 billion in cash as of the most recent quarter compared with only $3.7 billion in short-term debt. We also provide Growth, Momentum, Stability, and Sentiment grades for INTC, which you can find here. INTC is ranked No. 9 in the B-rated Semiconductor & Wireless Chip industry. For more top stocks in this industry, click here.
Silicon Motion Technology Corp. ADR (SIMO)
SIMO is a leading developer of microcontroller ICs for NAND flash storage devices. It focuses on the designing, developing, and marketing of controllers for managing NAND flash used in embedded storage applications, such as eMMC embedded memory. Its products are used in personal computing, smartphones and tablets, flash drives, and enterprise and data centers.
The company has been benefiting from strong demand for its solid-state drive (SSD) controllers and eMMC and UFS controllers. This led to an increase in both revenue and sales year over year in the most recent quarter. In fact, the company is a leading merchant supplier of client SSD controllers to module makers. Management believes the market will be dominated by SSDs that use TLC flash.
That should bolster their use in PCs, displacing mechanical hard disk drives. SSD offers higher performance and competitive advantage over HDDs, which is why PCs are increasingly adopting them. Plus, the company believes its SSD controller will be used for managing 3D flash from now on, and its eMMC controllers are also showing signs of a rebound.
The company has an overall grade of A and a Strong Buy rating in our POWR Ratings system. SIMO has a Growth Grade of B, which isn’t surprising with its EBITDA up 26.7% over the past year. Its EBITDA is expected to surge 30% over the next year. Analysts expect earnings to soar 110.5% year over year in the current quarter.
The company also has a Sentiment Grade of A, indicating it is well-liked by Wall Street analysts, as four out of six analysts rate the stock a “buy.” Plus, based on an average of analyst price targets, the stock has an upside potential of 45%. For the rest of SIMO’s grades (Value, Momentum, Stability, and Quality), click here. SIMO is ranked No. 3 in the B-rated Semiconductor & Wireless Chip industry.
Stocks to Buy: Broadcom Inc. (AVGO)
AVGO is the combined entity of Broadcom and Avago. Its Avago business is focused primarily on radio frequency filters and amplifiers used in high-end smartphones, such as the Apple iPhone and Samsung Galaxy devices. Its Legacy Broadcom business includes networking semiconductors, such as switch and physical layer chips, broadband products, and connectivity chips.
The company is benefiting from continued strength across both its semiconductor solutions and Infrastructure software verticals. For instance, the strong adoption of Wi-Fi 6 in access gateway and cable DOCSIS 3.1 products bode well for its long-term growth picture. Plus, the acceleration in 5G deployment and production ramp-up in radio frequency content also aids its future prospects.
In addition, the Internet of Things should create newer growth avenues for the company as it is widely believed to be the next growth opportunity in semiconductors. AVGO also continues to make acquisitions to expand the breadth and diversify its product portfolio. Management also provided upbeat guidance for the third quarter based on a strong uptick in broadband, networking, and wireless revenues.
AVGO has an overall grade of A, translating into a “strong buy” rating in our POWR Ratings system. The company has a Growth Grade of B as sales have grown an average of 18.5% per year over the past five years. Plus, analysts forecast earnings to rise 24.4% for the year. AVGO also has a Stability Grade of B as both its growth and price performance have been fairly consistent.
For instance, the stock has grown EBITDA an average of 41.9% per year over the past five years. To gains access to the rest of AVGO’s grades (Value, Momentum, Sentiment, and Quality), click here. AVGO is ranked No. 5 in the B-rated Semiconductor & Wireless Chip industry.
On the date of publication, David Cohne did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a Consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.