Technology is all around us, but many of us don’t think about the thousands of tiny semiconductor chips inside cell phones, laptops and even cars. This trend is set to continue with the rollout of 5G, internet of things and even augmented reality glasses. Thus, it’s no surprise IC Insights says global semiconductor revenue is forecast to grow 11% in 2022 and reach a record high of $680.6 billion. Revenue soared 25% in 2021.
The supply shock of 2020 caused automakers to be left without enough semiconductor chips, so many had to close production lines down. Autonews reported that analysts predict the chip shortage will continue into 2022. As such, here are my top three semiconductor stocks to play this trend.
Qorvo
Qorvo Inc. (QRVO, Financial) is a U.S. semiconductor company that manufactures radio frequency systems for applications such as Wi-Fi and 5G. The company has an envious but focused customer base of Apple (AAPL, Financial) (33% of revenue) and Huawei (10%). These companies purchase RF solutions for their respective (and widely popular) mobile devices.
The company has a competitive advantage or moat, which consists of an array of technology Patents (1,973 of which expire between 2020 and 2040).
Value investor Seth Klarman (Trades, Portfolio), who has been dubbed “the next Warren Buffett (Trades, Portfolio),” owns 5.58% of the company in the Baupost Group Fund. He was buying shares at an average price of $158 each.The stock is down 18% from the levels he was buying at and, therefore, could be undervalued.
According to the GF Value Line, which analyzes historic multiples, past financial performance and future earnings projections, the stock is modestly undervalued.
Micron
As one of the largest semiconductor companies in the world, Micron Technology Inc. (MU, Financial) is poised to benefit from the semiconductor demand and 5G trend. The company is one of only a handful of semiconductor manufacturers with the capability to produce dynamic random access memory chips. You may have seen the brands Micron and Crucial if you’ve ever upgraded your laptop's random access memory.
5G cell phones are an especially interesting tailwind for the company, as they have 50% higher DRAM and double the NAND content versus 4G phones. According to Juniper Research, 5G smartphone revenue is expected to reach $337 billion for the industry by 2025, up from $108 billion in 2021.
Legendary investor Mohnish Pabrai (Trades, Portfolio) has been investing in Micron Technology since 2018.
He added 15% to his position during the fourth quarter at an average price of $78 per share.
Pabrai has often said in interviews that he is not afraid to make focused bets and is happy to hold a single stock. While this might be the case with Micron as it now makes up 78% of his U.S. equity portfolio, the stock may only represent a small fraction of his overall holdings since 13F filings do not require investors to disclose positions in non-U.S. stocks or non-American depositary receipts.
Legendary traders Paul Tudor Jones (Trades, Portfolio) and Ray Dalio (Trades, Portfolio) were also loading up on shares.
Micron has produced strong results over the past year with revenue jumping 29% from $21 billion to $27 billion. Gross margins also increased to 37% of the revenue.
According to the GF Value Line, the stock is fairly undervalued as of the time of writing.
Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing Co. Ltd. (TSM, Financial) is the world's largest semiconductor foundry. The global giant manufactures 11,617 different products with 281 distinct technologies for over 510 customers. The company's customers include Apple, Advanced Micro Devices (AMD, Financial), Qualcomm and Nvidia (NVDA, Financial).
The company is a technology leader, producing a 5nm chip for Apple and even trailblazing a 3nm chip, extending its massive lead over Intel (INTC, Financial), which is still trying to produce a 7nm chip.
Taiwan Semiconductor has bullish revenue guidance of a 15% to 20% compounded annual growth rate and a high gross margin of 53%. Given a market capitalization of over $500 billion, these growth rates are staggering.
The GF Value Line puts the stock at fairly valued at the time of writing.
Final thoughts
Analysts predict the semiconductor chip shortage will continue this year. Once supply becomes more readily available, new technology such as 5G and IoT, along with the increasing number of devices, should be major tailwinds behind the companies on this list.
However, there are risks. In the fact-paced world of semiconductor manufacturing, innovation and quality is the key to staying on top. Thus, if any of these companies ran into a manufacturing issue, then that could leave them trailing behind their competitors. The second issue is the increasing tensions between Taiwan and China. A lot of semiconductor production is based in Taiwan and China has vowed for “semiconductor independence.”
Despite these issues, these semiconductor stocks could be great long-term bets on the future of the industry.
