Goldman Sachs picks its top chip stocks to play a new supply chain trend — including one it says has upside of over 60%

Published Wed, Apr 13 20228:35 PM EDTUpdated Thu, Apr 14 20221:39 AM EDT

Goldman Sachs has named several stocks it says are "well positioned" to benefit as countries around the world seek to secure their semiconductor supply. Semiconductors — often described as the brains of modern electronics — have wide-ranging applications in computing, health care, military systems, transportation, clean energy, among other areas. But the world is now experiencing a chip shortage, as supply chain disruptions from Covid-related complications and stimulus-driven demand are exacerbated by recent geopolitical events. "This perfect storm has given rise to a wave of discussion around "de-globalization" and the localization of supply chains, specifically in the semiconductor space," Goldman's analysts, led by James Covello, said on April 8. The bank said a full localization of the supply chain would mean that production and sourcing of all technological inputs take place within a given region. While this would protect supply chains against future pandemics and geopolitical events, the bank doesn't believe full localization is feasible, given the "punitively high" burden of replicating in each locale all the critical technological elements of the semiconductor supply chain. But the United States and Europe are on the verge of providing considerable government funding to subsidize local semiconductor investments. According to Goldman, that means certain parts of the supply chain could be re-shored the coming years. Stock picks In light of that, Goldman has named seven stocks it says are best positioned to support the future semiconductor ecosystem. The bank likes Taiwan Semiconductor Manufacturing Company , taking a positive view on underlying structural growth areas in the industry, such as 5G, artificial intelligence and high-performance computing. The bank is also positive on TSMC's solid technology leadership and execution, an easing competitive landscape, and sustainable shareholder returns. It has a price target of 842 Taiwanese dollars ($28.90), which closed at 558 TWD on April 11, representing a potential upside of 50.9%. Goldman also likes Dutch chip maker ASML . The bank views the company as a "core digital enabler," given its monopoly position on extreme ultraviolet lithography (EUV), which is critical in facilitating cost-effective production of advanced semiconductors. The bank sees further upside to the average selling prices of EUVs, which should support better gross margin profitability. It also sees sustainable capex in the industry, driven by tech transitions to support increasingly advanced chips required for digitalization. The bank has a price target of 930 euros ($1,011) on the stock, representing a 68.5% potential upside to its closing price of 552 euros on Apr. 11. Applied Materials also made Goldman's list. The bank is positive on the wafer fab equipment industry's fundamentals, broad product portfolio, continued margin expansion and sustained capital return. The bank has ascribed a price target of $151 on the stock, which closed at $116.20 on April 11— an implied upside of 29.9%. Read more Wall Street banks pick their top semiconductor stocks as electric vehicle production soars Intel CEO says semiconductors are like oil — making more in U.S. can avoid global crises California-based KLA Corp , a manufacturer of process control equipment for the semiconductor industry, is another stock that Goldman favors. The bank likes the company's segment-leading gross margins and strong balance sheet, which, coupled with the importance of process control in both the current environment and beyond, will position the company well against a more challenging macro backdrop in 2023, Covello said. Goldman has a price target of $430 on the stock, which implies a potential upside of 29.7% to the stock's closing price of $331.50 on April 11. The bank likes Lam Research , believing that the market is under-appreciating the company's improving competitive position in the leading-edge logic/foundry markets. Goldman sees the company as well positioned to gain further market share and expects an improvement in the company's gross and operating margins as supply-side dynamics normalize. Goldman's price target of $648 represents a potential upside of 36.2%, based on the stock's closing price of around $475.80 on April 11. Also making Goldman's list is Tokyo Electron , which the bank expects to continue from a cyclical but sustainable growth in the semiconductor market. Goldman said the company is a "key enabler" of global leading-edge chip manufacturing, given the significant revenue contributions from Samsung Electronics, Intel, and TSMC. The bank has a price target of 67,000 Japanese yen ($533.20) on the stock which closed at 53,890 yen on April 11, representing a potential upside of 24.3%. Rounding off Goldman's list is Japan's Screen Holdings . The bank believes the company will benefit from growing semiconductor and equipment market, given its "particularly high" market share in the cleaning tool market. The company counts TSMC and Intel among its top customers. The bank's price target of 15,000 yen implies a potential upside of 41.2% to its closing price of 10,620 yen on April 11.

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Goldman Sachs has named several stocks it says are "well positioned" to benefit as countries around the world seek to secure their semiconductor supply.