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Supply Crunch Puts Microchips in Focus: 5 Stocks to Buy

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The global microchip shortage has been hurting a number of industries, most importantly automobile, electronic goods and videogames. So much so that many automakers have been cutting down production targets and even temporarily closing down plants.

This, at the same time, has been benefiting the microchip industry that has been growing leaps and bounds driven by soaring demand. As a result, microchip sales have jumped every month of a year now.

Industries Plagued by Microchip Shortage

The automakers were one of the biggest casualties of the pandemic when plants had to be closed down for weeks hampering production. And when they were just hoping for a rebound, the global semiconductor shortage once again started hurting them, with companies scaling down production of cars and other vehicles.

Starting this week, General Motors Company (GM - Free Report) has halted production at a number of its plants manufacturing pickups. Also, Nissan Motor Co. (NSANY - Free Report) is planning to close its factory in Smyrna, Tennessee, for two weeks, as it doesn’t have enough semiconductors to continue production.

The shortage was so long primarily hurting the automobile sector but now the crisis is spreading to consumer tech. Last week,Apple, Inc. (AAPL - Free Report) warned that the supply crunch of semiconductors would impact the sales of iPhones in the near term. Also, Microsoft Corporation (MSFT - Free Report) said that it is struggling to produce Xbox consoles and Surface laptops due to the same shortage.

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. Semiconductor sales came in at $133.6 billion in the second quarter, jumping 29.2% year over year and 8.3% from the first quarter of 2021. 

So far, it has been a great year for the semiconductor industry and the trend is likely to continue given the high demand for microchips. Semiconductor sales grew 29% in June to $44.5 billion from $34.5 billion a year ago, according to SIA.

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. However, the semiconductor shortage is now hampering the balance between demand and supply.

That said, there is not much doubt that demand for microchips will remain robust for quite some time.

Our Choices

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

Maxim Integrated Products, Inc. is an original equipment manufacturer of semiconductor analog and mixed-signal integrated circuits. The company has a broad product portfolio that includes analog-to-digital converters, amplifiers and comparators, communications devices, data converters, and management components, sensors and wireless products.

Maxim announced on Aug 4 that it will team up with Xailient Inc., a company focused on AI for the edge, to come up with the world’s fastest-power and lowest-power IoT face detection.

The company’s expected earnings growth rate for the current year is 16.4%. The Zacks Consensus Estimate for current-year earnings has improved 3.6% over the past 30 days. Maxim Integrated Products holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MACOM Technology Solutions Holdings, Inc. (MTSI - Free Report) is a provider of power analog semiconductor solutions to varied markets. The company develops and produces analog radio frequency, microwave and millimeter-wave semiconductor devices, and components for applications in optical, wireless and satellite networks.

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 3.9% over the past 30 days. MACOM Technology Solutions carries 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 more than 100%. The Zacks Consensus Estimate for current-year earnings has improved 29.5% over the past 30 days.ON Semiconductors holds a Zacks Rank #1.

Texas Instruments Incorporated (TXN - Free Report) is an original equipment manufacturer of analog, mixed-signal and digital-signal processing integrated circuits. The company recently announced that it will be introducing a new TI-84 graphing calculator that will supportthe programming language Python.

The company’s expected earnings growth rate for the current year is 31.7%. The Zacks Consensus Estimate for current-year earnings has improved 6.5% over the past 30 days. Texas Instruments carries a Zacks Rank #2.

Semtech Corporation’s (SMTC - Free Report) devices are used in a variety of applications including computer, communications, industrial, military-aerospace and automotive. The company also provides a limited amount of wafer foundry services to other electronic component manufacturers.

The company’s expected earnings growth rate for the current year is 39.4%. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the past 30 days. Semtech has a Zacks Rank #2.