As a global semiconductor shortage affects everything from computers to the automotive industry, companies like Nvidia (NVDA) – Get Report and advanced microdevices (AMD) – Get Report are on every investor’s radar. Rising demand for the silicon chip used in countless electronic devices has propelled the shares of both companies, as well as many others, astronomically.
But while rising stock prices can make support for the big players feel like a no-brainer, industry volatility means newer or smaller companies with high growth potential are constantly emerging. Due to the industry’s reliance on factors such as foreign supplies and diplomacy between the US and China, it is not always as simple as looking at current sales and growth to determine a long-term investment strategy.
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An example of this is Taiwan Semiconductor Manufacturing (TSM) – Get Report.
Stock of Taiwan Semi, one of the world’s largest independent semiconductor foundries, is up 120% in the past year. But it may have reached its highest rating as more companies making similar products enter the market. According to a research report by World Semiconductor Trade Statistic, the global semiconductor market is expected to grow by 19.71% to $527 billion by 2021.
“I think we’re going to see a significant increase in chip production and that will lead to some incredible opportunities, especially in some of these support players,” Quint Tatro, the chief investment officer of consulting firm Joule Financial, told TheStreet. . “Companies will meet the demand and start pumping out chips like no other.”
There are now over 750 semiconductor companies worldwide – other strong players include NXP Semiconductors (NXPI) – Get Report, Applied materials (AMAT) – Get Report and KLA (KLAC) – Get Report. In the United States, Intel (INTC) – Get Report and Qualcomm (QCOM) – Get Report have been making semiconductor technology for decades. Globally, Asia-Pacific dominates with more than 60% of world sales.
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But while the spotlight is currently on those who actually make semiconductors, ancillary products are just as necessary to ramp up production, while being treated as a secondary investment. Tatro says investors should keep a close eye on Axcelis Technologies (ACLS) – Get Report, a Massachusetts-based company from which Taiwan Semiconductor purchases its manufacturing equipment. He said the company has raised its book value to more than 16% over the past five years while trading at multiples of 15, a cheap investment given its growth potential.
“When you think of Taiwan Semiconductors [manufacturing plans], they will need more fabrication equipment to actually produce the semiconductors,” Tatro said. “We are confident that we will see an increase in orders for Axcelis fabrication equipment, which will greatly benefit the company.”
Another example is Taiwan-based mCore Technology, which specializes in packaging around semiconductor chips. Tatro explained that after receiving the semiconductors from Taiwan Semiconductor, Intel and Apple (AAPL) – Get Report, the company packages them in a way that makes them ready to enter a product like a computer. Rising demand means the company’s revenue grew 25% year over year, while net income grew nearly 200%.
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Another option is Ultra Clean Holdings (UCTT) – Get Report, which creates tools and subsystems for the semiconductor.
“Like Axcelis, mCore should be an absolute benefactor of the increase in production in growing revenues,” Tatro said. “[…] They have about 42% debt to equity, so it’s a little more debt than I’d like to see, but they have strong cash flows and we believe that with a forward multiple of less than 11, this company is undervalued and ready for this a kind of additional upswing in production.”
Defiance ETF’s co-founder and chief investment officer, Sylvia Jablonski, said other lesser-known names include Qorvo (QRVO) – Get Report, the growth of which is likely to be very strong as more of the wireless industry moves to the 5G technology in which the company specializes.
MaxLinear (MXL) – Get Report and GCP applied technologies (GCP) – Get Report are rapidly approaching a major breakout in profitability as companies like Texas Instruments (TXN) – Get Report are valuable because they have their own foundries and will be protected from global shortages.
“All these companies make the list for me because they are pretty much in the ideal situation for building the basic equipment to deploy the 5G technology,” Jablonski told TheStreet.
“Any company associated with that will experience healthier profit margins,” Jablonski added.
Investors whose knowledge of semiconductors comes from the current investment buzz should also consider starting an ETF, Jablonski advised. Along with her company’s 5G ETF (FIVG) – Get Report, VanEck Vectors Semiconductor ET (SMH) – Get Report and iShares Semiconductor ETF (SOXX) – Get Report include both major players and less high-profile companies such as Entegris (ENTG) – Get Report and ASE technology (ASX) – Get Report.
By providing broad exposure to the sector, potential investors can track the various interests and gain a better understanding of individual companies to watch out for.
But overall, Jablonski said choosing the right company is less important than getting into the industry in general. The chip shortage isn’t going to go away anytime soon, and with data from the Semiconductor Industry Association showing it can take up to 26 weeks to produce a finished chip, investment opportunities should remain strong for at least the next five years.
“There has been a lot of talk by (President) Biden about the 5G infrastructure package and connecting rural and urban America,” Jablonski said.
“Many of the companies that make that possible are semiconductor companies. There’s no machine-to-machine communication, no automation processing, no AI or any of the other huge innovations in our semiconductor-less future,” Jablonski said.