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Chip Shortage Unsettles Auto Market: 4 Semiconductor Picks

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Just when things seemed to be looking up for the auto market, with sales recovering from coronavirus lows, the industry is now getting mired in another set of problems. This time it is the mounting shortage of semiconductors for auto parts, which is leading to production disruptions for major auto biggies.

As we know, the coronavirus outbreak crippled the auto industry during the first half of 2020 amid sluggish demand, factory shutdowns, sagging traffic in dealerships and supply chain distortions. However, things started improving from the third quarter on pent-up demand, easier credit conditions and preference for private transportation amid the socially-distant environment. The momentum continued in the fourth quarter, with many companies reporting stronger year-over-year sales. However, the latest speed bump to hit the auto industry is the scarcity of chips, thereby prompting automobile production cuts.

If the scarcity lasts long, production cuts would further dry up the inventory of vehicles, at a time when automakers have been concentrating on replenishing the same, as faster-than-expected demand for vehicles led to a reduction in inventory levels. During coronavirus-induced factory closures, semiconductor firms reassessed production capacities and shifted focus on catering to the rising demand for consumer electronics. Obviously, with automakers gaining traction of late, they have been facing shortage of chips.

Automakers Running Out of Chips, Brace for Output Cut

Auto bigwigs like Ford (F - Free Report) , Nissan (NSANY - Free Report) ,Toyota (TM - Free Report) and many more are facing production constraints amid shortage of chips and are thus forced to delay production of some of their models.

Ford is temporarily shutting operations in the Louisville plant in Kentucky, which produces Escape and Lincoln Corsair SUV models. U.S. auto giant General Motors, which is Ford’s closest peer, has not been affected by the widening deficit of chips as yet but is closely monitoring the situation. Detroit-based automaker, Fiat Chrysler has already suspended factories in Brampton, Ontario and Toluca. This will affect models like Jeep Compass, Chrysler 300, as well as Dodge Charger and Challenger.

Japan-based Nissan is trimming production in the Oppama factory in Japan, wherein the firm’s subcompact car Note is developed. Notably, Nissan’s U.S. production has not been affected yet. Japan’s largest automaker, Toyota is forced to limit the production of Tundra pickup in the San Antonio plant. Last month, Germany’s biggest automaker, Volkswagen notified its intention to adjust production in China, Europe and North America amid chip supply bottleneck. Models based on the MQB platform including ŠKODA, SEAT, and other commercial as well as passenger vehicles will be affected.

Chip deficit in the auto market has forced carmakers to divert attention from less-popular sedans and instead prioritize on pickups, crossovers, as well as SUVs. Production bottleneck is highlighting another emerging crisis in the auto industry. Per Wall Street reports, the auto sector is bracing for declining output due to semiconductor shortage.

Semiconductors Application in Auto Sector to Keep Shining

Amid rapid digitization in the auto industry, usage of semiconductors in new vehicles is getting more vital than ever, thanks to features like assisted driving, in-car entertainment, Bluetooth connectivity and more. Technological advancements are changing the dynamics of the auto industry and semiconductors are at the heart of technology. Semiconductors have far-reaching benefits for the electric vehicle (EV) industry and are directly responsible for improvement in the battery efficiency of green vehicles. As a matter of fact, the more technologically advanced the EV, the more semiconductors it requires. So basically, chips matter to automakers in a big way!

Semiconductor application in the automotive segment is poised to see very rapid growth as infotainment and smart dashboards are expected to make way for much higher volumes of chips that will be necessary to equip/enable automated/self-driving cars, electric/solar-powered cars and so on.

As it is, the semiconductor market — which is the building block of technology — is red hot and prospects will blossom further amid greater dependence on automation, digitization, as well as artificial intelligence (AI). Per World Semiconductor Trade Statistics organization, the semiconductor industry’s worldwide sales are expected to increase 8.4% in 2021. The forecast for 2021 is more than the previously-projected growth of 6.2%, made by the WSTS in July. Below we present a few stocks that you may want to consider for your portfolio.

Our Choices

NVIDIA Corporation (NVDA - Free Report) : This U.S.-based tech giant is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. Growth opportunities in ray-traced gaming, rendering, high-performance computing, AI, and electric and self-driving cars are encouraging. Flaunting a Zacks Rank #1 (Strong Buy), NVIDIA has an expected long-term EPS growth of 18.3%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Taiwan Semiconductor Manufacturing Company Ltd. (TSM - Free Report) :Taiwan Semiconductor is one of the leading chip manufacturers in the world. The firm runs a dedicated semiconductor foundry business and boasts the “world's largest semiconductor design ecosystem”. TSM also stands to capitalize on the transition to 5G, and benefit in the long haul from a world where chips are commonplace and vital. Taiwan Semiconductor presently sports a Zacks Rank #1. The company’s expected earnings growth rate for the next year is 24.5%.

NXP Semiconductors N.V. (NXPI - Free Report) : The firm provides high performance mixed-signal and standard product solutions that leverage its RF, analog, power management, interface, security, as well as digital processing expertise. NXP's diversified product portfolio is a key catalyst. Its leading market position and focus on communications infrastructure, automotive and industrial, as well as IoT markets remain major positives. Carrying a Zacks Rank #2 (Buy), NXP has an expected long-term EPS growth of 10%.

Maxim Integrated Products, Inc. (MXIM - Free Report) : Maxim Integrated is an original equipment manufacturer of semiconductor analog and mixed signal integrated circuits. The company is seeing broad-based demand across all its served markets, with particular strength in infotainment, driver assistance and electric vehicle content in the automotive market, and across smartphones, gaming, wearables, tablets, as well as broad-based personal electronics in the consumer market. The company holds a Zacks Rank #2 and has an expected long-term EPS growth of 10%.

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