By Michael Kern
A global shortage in semiconductor chips has been wreaking havoc on the tech sector, automotive industry, consumer electronics industry, and everything in between thanks to massive supply chain snarl ups. The global Covid-induced supply crunch for chips has badly hurt production across a number of industries, ranging from cars to consumer appliances, smartphones and personal computers. The trade war between the United States and China has only served to make a bad situation worse.
About a year ago, the U.S. Commerce Department declared Chinese chip manufacturer Semiconductor Manufacturing International, or SMIC, persona non grata after determining the company supplies the Chinese military with chips thus making it a threat to national security. The federal government restricted SMIC from obtaining some U.S.-regulated chip-making equipment leading to U.S. buyers cutting back orders from the company. SMIC is one of the largest manufacturers of semiconductor chips, accounting for about 5% of global semiconductor supply. Although the Biden administration recently granted SMIC and Huawei suppliers billions of dollars worth of licenses from November through April that allows them to sell them goods and technology despite their remaining on the U.S. trade blacklist, it remains to be seen if the move will ease the shortages.
The alarming part: Some experts expect the supply chain glitches to drag on into 2022.
But whereas the global chip shortage has been a nightmare for businesses that make cars and home appliances as well as people who buy them, semiconductor stock investors are hardly complaining as they continue to see outsized gains on their investments.
For instance, shares of gaming and auto chip manufacturer Nvidia Corp. (NASDAQ:NVDA) have gained 40% over the past 30 days; those of smartphone chip maker Qualcomm Inc. (NASDAQ:QCOM) are up 38% while those of computer chip maker Advanced Micro Devices Inc. (NASDAQ:AMD) have added 25%.
Overall, the biggest semiconductor benchmark, iShares PHLX SOX Semiconductor Sector Index ETF (NASDAQ:SOXX) is up 15% over the past months compared to a modest 4% gain by the S&P 500.
Investment bank JPMorgan is recommending that investors pursue longer-term trends in the semiconductor space that are more structural than cyclical. Structural trends tend to be longer-term, permanent changes in an industry whereas cyclical trends are influenced by the business cycle and tend to be short-lived.
JPM recommends investing in very high-end computing segments, noting there’s ongoing disruption in high-end computing globally, which used to be very monolithic but is now being fragmented as more companies enter the space.
JPMorgan also recommends investing in semiconductor companies that focus on legacy, long-tail technologies. These companies manufacture a variety of less advanced chips in areas like power management, microcontrollers, sensors and other consumer-related segments.
Bearing this in mind, here are our top semiconductor chip stocks for long-term investors.
#1. Taiwan Semiconductor Manufacturing Company Limited
Taiwan Semiconductor Manufacturing Company Ltd (NYSE:TSM) is the world’s largest contract manufacturer for semiconductor chips. The company counts tech heavyweights such as Apple Inc. (NASDAQ:AAPL), Nvidia and Qualcomm as its clients. In fact, TSMC is so dominant that it accounted for 54% of total foundry revenue globally last year as per TrendForce data.
TSMC manufactures some of the most advanced chips for fabless tech companies that do not own their own foundries. Last month, Wedgewood Partners, an investment management firm, had this to say about TSMC:
“Taiwan Semiconductor Manufacturing detracted from performance as the market attempted to price in a downturn in the semiconductor cycle. Although there are some signs that memory markets might be somewhat oversupplied, we have yet to see any tangible signs that logic semiconductors – particularly at the leading-nodes where the Company dominates – are in anything but short supply. In addition, and as a result of this strong demand, the Company should be able to pass through price increases to help fund very attractive returns on the rare leading-edge capacity that serves this demand.”
Indeed, TSMC is reportedly raising prices by 10% for advanced chips, while less advanced chips–used commonly by automakers–would cost 20% more.
#2. ASML Holding
ASML Holdings (NASDAQ:ASML) is a Dutch semiconductor equipment maker. ASML develops, produces, markets, sells, and services advanced semiconductor equipment systems consisting of lithography, metrology, and inspection related systems for memory and logic chipmakers. The company is the world’s largest manufacturer of lithography machines used to etch circuit patterns onto silicon wafers. Indeed, ASML is the world’s sole manufacturer of high-end extreme ultraviolet (EUV) lithography machines required to manufacture the smallest and most advanced chips.
It’s, therefore, hardly surprising that ASML counts Taiwan Semiconductor Manufacturing , Intel (NASDAQINTC) and Samsung (OTC:SSNLF) as top customers for its EUV machines. ASML has been recording robust demand for its advanced chip-making machines, helping the company to grow the topline by 35% in the current year compared to 18% growth in 2020. Further, a product mix that increasingly lean towards high-end machines has helped boost its gross margins by 75 basis points to 52.2% in 2021 compared to 2019.
#3. UMC Corporation
United Microelectronics Corporation (NYSE:UMC) is another Taiwan-based wafer foundry with operations in the United States, Europe, China, Singapore, Hong Kong, and Japan. The company serves fabless design companies and integrated device manufacturers and provides circuit design, mask tooling, wafer fabrication, and assembly and testing services.
Unlike TSMC which manufactures some of the world’s most advanced chips, UMC primarily manufactures larger, and cheaper auto and IoT chips for cars, and other gadgets. You can think of UMC as TSMC’s smaller, less glamorous peer.
UMC has reported that YTD sales were up 17.89% Y/Y to NT$173.07B, with October net sales growing 25.36% Y/Y to NT$19.16B, compared to NT$18.75B in September. Wall Street remains fairly bullish on UMC with a $13.77 price target, good for 21% upside.