Wall Street analysts pick their top stocks as the chip shortage rages on

Published Mon, May 17 202110:41 AM EDTUpdated Mon, May 17 202111:30 AM EDT

Wall Street analysts have picked a number of stocks set to benefit from the ongoing chip shortage, which is now impacting a whole host of businesses. Semiconductor supply chain issues are no longer confined to the automotive industry, where the likes of Ford , Jaguar Land Rover and Volkswagen have shut down factories, slashed production and laid off staff. In recent weeks, companies spanning from consumer electronics giant Samsung to niche dog washing cubicle maker CCSI have all reported production issues. With no end in sight, analysts expect the global chip shortage to last well into next year and possibly even into 2023. It's creating a key opportunity for investors, according to Wall Street analysts, who have picked a number of stocks to buy as the semiconductor industry tries to plug the gap. Bernstein In a note published earlier this month, Bernstein's analysts led by Stacy Rasgon said they continue to favor chipmakers Qualcomm and Nvidia . They have outperform ratings on the stocks. "Continuing product cycles can drive significant earnings growth and support the multiple, furthering upside in the shares," they said of Nvidia. They like NXP Semiconductors — "with an auto recovery story that we believe has legs" — and Broadcom , which they noted had a "sold-out semi business this year, support from software, use-of-cash forthcoming, a strong dividend, best-in-class margins, & attractive valuation." Both are rated outperform by the analysts. They also favor Applied Materials and Lam Research , and said the sector still had "plenty of room to revise upward in the near term, with an extremely attractive long-term secular story amid rising capital intensity." However, the analysts were less bullish on Intel . "Intel's long-term structural issues have finally broken to the forefront, with competitive pressures increasing amid an outlook that remains uncertain," they wrote. The Bernstein note highlighted that mentions of semiconductor shortages have "skyrocketed" at company events and on earnings calls in recent weeks. "Companies of all stripes (are) discussing the impact of chip shortages on their business and outlook with numerous examples as wide ranging as medical devices, chemicals, metals and mining, apparel, and even tobacco as either their own or their customers' production begins to be impacted by the disruptions," they said. They added that most semiconductor companies are continuing to "put up good numbers on the back of ever-strengthening demand." Goldman Sachs Four analysts at Goldman Sachs said in a note last week that more chips will be made in the third quarter of 2021 but that "tightness will likely persist into 2022." But the analysts, led by Mark Delaney, wrote: "We believe the semi industry is making progress at increasing output." They said the second quarter will likely be the peak of the semiconductor supply shortages, adding there would be some improvement in the second half of the year. This comes after Goldman highlighted last month that one way to get exposure to the situation was via companies that provide major chipmakers like Intel and TSMC with specialist equipment. Like Bernstein, the bank liked Applied Materials and Lam Research. Other picks included Teradyne , Entegris and ASML . When it comes to the automakers, the Goldman analysts noted Sunday that the impact to automotive production had varied significantly between companies. For example, Tesla has found alternative suppliers to mitigate the impact of the semiconductor shortage, the analysts highlighted, and has taken steps such as rewriting firmware in some instances. Elon Musk's electric car company believes the chip shortage issues may continue into the second and third quarters, but has said the situation is improving. Goldman analysts maintained their buy rating on Tesla following its earnings at the end of last month. UBS Meanwhile, UBS said in a note on April 23 that it was maintaining its buy rating on Intel despite some "moving parts and questions." Analysts Timothy Arcuri and Pradeep Ramani wrote that Intel could obtain subsidies in excess of $6 billion from Europe or the U.S. that would help to cushion its cash flow. Earlier this year, Intel promised to spend $20 billion on two new chip manufacturing plants, known as foundries, in Arizona. On the other side of the Atlantic, UBS is bullish on German chipmaker Infineon as it believes the current tightness in chip supply should work in the company's favor. In a note on May 5, analysts David Mulholland and Francis-Xavier Bouvignies said accelerating demand for electric vehicles can "drive Infineon to re-rate higher as one of the most attractive through-cycle growth names in the sector." Credit Suisse Credit Suisse director of global economies and strategy Wenzhe Zhao, at Credit Suisse said in a note Wednesday that recent chip shortages had encouraged inventory hoarding along chip production chains, thereby exacerbating the gap between rising demand and stagnant supply. He said that new semiconductor production capacity won't come online until 2022 or later and that little can be done to address today's shortage besides adjusting order books, production schedules, and prices. "Leading producers such as TSMC and Intel have recently suggested the worst of auto chip shortages may have passed; supply limitations for the entire industry, on the other hand, will unlikely ease until 2022 or later," Zhao wrote. "New production capacity is the ultimate answer to chip shortages. Capex plans are accordingly adjusting," he added. "Increased capital investment will yield clear benefits." TSMC has pledged to spend $100 billion over three years to grow its production capacity, while Samsung is planning to spend $116 billion on its chip business over the next decade. Looking ahead, Zhao noted that there's a risk of excess chip capacity coming into play. "The political urge to secure future capability may lead to groupthink and poor coordination, worsening prospects for commercially rewarding investment by firms," he said.

Components are displayed on a circuit board at the Qualcomm Inc. booth at the Mobile World Congress Shanghai in Shanghai, China, on Thursday, June 28, 2018.

Qilai Shen | Bloomberg | Getty Images

Wall Street analysts have picked a number of stocks set to benefit from the ongoing chip shortage, which is now impacting a whole host of businesses.

Semiconductor supply chain issues are no longer confined to the automotive industry, where the likes of Ford, Jaguar Land Rover and Volkswagen have shut down factories, slashed production and laid off staff. In recent weeks, companies spanning from consumer electronics giant Samsung to niche dog washing cubicle maker CCSI have all reported production issues.

With no end in sight, analysts expect the global chip shortage to last well into next year and possibly even into 2023.

It's creating a key opportunity for investors, according to Wall Street analysts, who have picked a number of stocks to buy as the semiconductor industry tries to plug the gap.