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Supply Shortage Boosting Microchip Demand: 6 Stocks to Buy

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The semiconductor industry has been doing well for quite some now but what is worrying is a supply crunch amid growing demand for microchips. The pandemic saw sales of electronic goods soaring which led to a rise in demand for microchips.

However, chipmakers are now struggling to meet growing demand which is affecting other industries including automakers. So much so that the White House too is now working toward addressing the supply crunch that is compelling automakers to cut production.

That said, the semiconductor industry remains one of the biggest beneficiaries of the pandemic and soaring demand is likely to further help it in the coming days.

Supply Crunch Hitting Automakers

All leading automakers such as Ford Motor Company (F - Free Report) , General Motors (GM - Free Report) and Fiat Chrysler Automobile N.V. have been warning investors about slowing production due to supply shortage of semiconductors and extending production cuts. This has posed as a new threat to the automakers just at a time when they were trying to stand back on their feet after taking a massive hit last year due to the pandemic.

Even White House Press Secretary Jen Psaki last week said that the Biden administration is trying to identify potential choke points in the supply chain and is closely working with stakeholders to address the problem. Semiconductor demand has been on the rise due to the strong demand for electronics during the pandemic, which is resulting in the shortage.

However, not only the automobile industry but also the electronic companies are facing similar problems. Sony Corporation (SNE) recently said that microchip shortage is hampering supply of PlayStation 5 game consoles to consumers.

Semiconductor Industry on Growth Track

According to the Semiconductor Industry Association (SIA), the microchip industry is projected to grow this year, after rebounding in 2020. Global semiconductor sales hit $439 billion in 2020, growing 6.5% from the 2019 total of $412.3 billion, according to SIA.

The semiconductor industry also had an impressive fourth quarter, wherein sales grew 8.3% to $117.5 billion compared to fourth-quarter 2019. Overall, fourth-quarter 2020 sales grew 3.5% from the third quarter.

Microchips are an important part of both the auto and the infotainment industries. The recovery of the automotive sector was faster than projected, due to pent-up demand during the shutdown period, which is now hampering the balance between demand and supply.

The supply shortage is a sign that demand for microchips is expected to remain high for some time.

Our Choices

The semiconductor market is likely to continue thriving in 2021. Below are five chip stocks that investors can gain from in the current scenario.

NXP Semiconductors N.V. (NXPI - Free Report)  provides high-performance, mixed-signal and standard product solutions that leverage its RF, analog, power management, interface, security, as well as digital processing expertise. 

The company’s expected earnings growth rate for next year is 19.4%. The Zacks Consensus Estimate for current-year earnings has improved 14.5% over the past 30 days. NXP Semiconductors sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

MaxLinear, Inc. (MXL - Free Report) is a provider of radio-frequency analog and mixed-signal semiconductor SoC solutions for broadband communication applications offering small silicon die-size, and low power consumption. 

The company’s expected earnings growth rate for the current year is more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 13.4% over the past 30 days.MaxLinear has a Zacks Rank #1.

Taiwan Semiconductor Manufacturing Company Ltd. (TSM - Free Report) is the world's largest dedicated integrated circuit foundry. It manufactures proprietary IC designs using its advanced production processes.  

The company’s expected earnings growth rate for the current year is more than 18.3%. The Zacks Consensus Estimate for current-year earnings has improved 3.6% over the past 30 days. Taiwan Semiconductor has a Zacks Rank #2 (Buy).

Texas Instruments Incorporated (TXN - Free Report) is an original equipment manufacturer of analog, mixed-signal and digital-signal processing integrated circuits.

The company’s expected earnings growth rate for the current year is 12.1%. The Zacks Consensus Estimate for current-year earnings has improved 13% over the past 30 days.Texas Instruments carries a Zacks Rank #2.

STMicroelectronics N.V. (STM - Free Report) designs, develops, manufactures and markets a broad range of semiconductor integrated circuits and discrete devices used in a wide variety of microelectronic applications, including telecommunications systems, computer systems, consumer products, automotive products and industrial automation and control systems.

The company’s expected earnings growth rate for the current year is 50.4%. The Zacks Consensus Estimate for current-year earnings has improved 13.8% over the past 30 days.STMicroelectronics has a Zacks Rank #2.

ON Semiconductor Corporation (ON - Free Report) is an original equipment manufacturer of a broad range of discrete and embedded semiconductor components.

The company’s expected earnings growth rate for the current year is 92.9%. The Zacks Consensus Estimate for current-year earnings has improved 18% over the past 30 days. ON Semiconductors holds a Zacks Rank #2.

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