The semiconductor industry witnessed an astonishing performance in 2021 buoyed by strong demand as the U.S. and global economy reopened from pandemic-ridden restrictions. Prolonged shortage of chipsets owing to the coronavirus-led destruction of the global supply-chain system bodes well for the industry. The situation is likely to continue this year too.

At this stage, it will be prudent to invest in semiconductor stocks with a favorable Zacks Rank with strong growth potential in 2022. Five of them are Advanced Micro Devices Inc. (AMD Quick QuoteAMD - Free Report) , QUALCOMM Inc. (QCOM Quick QuoteQCOM - Free Report) , Texas Instruments Inc. (TXN Quick QuoteTXN - Free Report) , NVIDIA Corp. (NVDA Quick QuoteNVDA - Free Report) and Analog Devices Inc. (ADI Quick QuoteADI - Free Report) .

Strong Demand for Chipsets

The use of chipsets is increasing rapidly in various industries of the economy. From consumer electronics to automakers, high-tech computers, medical devices and fighter jet missile systems, are using chipsets. However, the coronavirus-induced breakdown of the global chipset supply-chain system has created a ruckus within the economy, resulting in soaring inflation across the world.

Last month, the Biden administration reported that a global semiconductor shortage will persist until at least the second half of 2022.  The report said “there is a significant, persistent mismatch in supply and demand for chips.” The report also stated that the median demand for chips was 17% higher in 2021 than 2019.

CNBC reported citing an analyst report of Euler Hermes that semiconductor sales are likely to exceed $600 billion for the first time in 2022, climbing 9% after soaring 26% to $553 billion in 2021. Gartner reported that in 201, globally semiconductor companies incurred $146 billion as capital expenditure building new production capacity and on R&D.

Several giant chipset manufacturers in the United States, Asia and Europe are ramping up capital spending creating new facilities for chipset production to cater to massive pent-up demand. The demand for chipsets will remain strong due to the complexity of new leading-edge technologies.

Future Catalyst for Semiconductor Industry

The White House has pressured U.S. Congress to quickly pass legislation providing $52 billion to help computer chip manufacturers and ease the shortage of components vital for a range of industries.

The Biden administration has expressed concerns that the United States had a 37% share of the global semiconductor and microelectronic production in 1990, which has drastically dropped to just 12%. Consequently, U.S. businesses, especially the auto and high-tech industries are suffering from an acute shortage of chipsets owing to the breakdown of the global supply chain during the pandemic.

Additionally, the Asian giant China is aggressively spending more than $150 billion to boost semiconductor manufacturing and unsettle the United States from its global leadership in this key technology. These show the urgency of the White House to strengthen its high-tech semiconductor industry.

Our Top Picks

We have narrowed our search to five chipset bigwigs (market capital > $80). These stocks have strong growth potential for 2022 and have seen solid earnings estimate revisions within the last 30 days. Each of our picks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows the price performance of our five picks in the past year.

Image Source: Zacks Investment Research

Texas Instruments is benefiting from growth in the personal electronics market owing to the coronavirus-led work-from-home trend. Additionally, solid momentum across the Analog segment owing to robust signal chain and power product lines, is benefiting the top line of TXN.  

The continued rebound in the automotive market is a tailwind for Texas Instruments. Solid growth in the industrial market is another positive for TXN. Strategic investments in new growth avenues and competitive advantages should also reap results in the long term. TXN’s portfolio of long-lived products and efficient manufacturing strategies are the other catalysts.

Zacks Rank #1 Texas Instruments has an expected earnings growth rate of 10.5% for the current year. The Zacks Consensus Estimate for current-year earnings improved 0.1% over the last 7 days.

Advanced Micro Devices is riding on robust performance from the Computing and Graphics, and Enterprise Embedded and Semi-Custom segments. AMD is benefiting from the strong sales of its Ryzen and EPYC server processors, owing to the increasing proliferation of AI and Machine Learning in industries like cloud, gaming and supercomputing.

The growing clout of 7 nanometer products in the data center vertical, driven by work-from-home and online learning trends, is a key catalyst of Advanced Micro Devices. AMD has raised its 2021 guidance for revenues on the back of strong growth across all businesses.

Zacks Rank #1 Advanced Micro Devices has an expected earnings growth rate of 43.4% for the current year. The Zacks Consensus Estimate for current-year earnings improved 20.5% over the last 7 days.

QUALCOMM is well positioned to benefit from a solid 5G traction with greater visibility to meet its long-term revenue targets. For calendar-year 2021, 5G handsets with QUALCOMM chips are expected to witness 150% year-over-year growth at the midpoint to about 450-550 units.

QUALCOMM has raised the bar for driverless cars with the launch of the first-of-its-kind automotive platform — Snapdragon Ride — which enables automakers to transform their vehicles into self-driving cars using AI.

Zacks Rank #1 QUALCOMM has an expected earnings growth rate of 26.7% for the current year (ending September 2022). The Zacks Consensus Estimate for current-year earnings improved 2.7% over the last 7 days.

NVIDIA is benefiting from the coronavirus-induced work and learn-at-home wave. NVIDIA is also benefiting from strong growth in GeForce desktop and notebook GPUs, which is boosting gaming revenues. Moreover, a surge in Hyperscale demand remains a tailwind for NVIDIA’s Data Center business.

The expansion of NVIDIA GeForce NOW is expected to drive its user base. Further, the solid uptake of AI-based smart cockpit infotainment solutions is a boon. The collaboration with Daimler-owned Mercedes-Benz is expected to strengthen NVIDIA’s presence in the autonomous vehicles and other automotive electronics spaces.

Zacks Rank #2 NVDA has an expected earnings growth rate of 18.8% for the current year (ending January 2023). The Zacks Consensus Estimate for current-year earnings has improved 1% over the last 30 days.

Analog Devices has strength across communication, consumer, industrial and automotive end-markets. Further, solid demand for high-performance analog and mixed-signal solutions was a tailwind. Growing momentum across the electric vehicle space on the back of robust Battery Management System solutions remains a positive for ADI.

Further, growing power design wins are the other positives for Analog Devices. The solid momentum of the HEV platform across cabin electronics ecosystem remains a tailwind for ADI. Moreover, Analog Devices remains optimistic about the growth prospects associated with its Maxim acquisition and 5G.

Zacks Rank #2 ADI has an expected earnings growth rate of 16.6% for the current year (ending October 2022). The Zacks Consensus Estimate for current-year earnings has improved 0.9% over the last 30 days.