Chip stocks are garnering their fair share of attention in 2021, as a global semiconductor shortage affects all aspects of our daily lives.
The reality is that our modern world runs on chips, and they provide the backbone to everything we do – from working on computers to talking on phones and, increasingly, to driving our cars.
Today's newer cars, from electric vehicles (EVs) to hybrids to traditional combustion engine cars, have more technology in them than autos of the past. And technology such as lidar (light detection and ranging) for parking assistance or rudimentary systems for driver assistance requires more semiconductor chips to power it.
Due to the global chip shortage, car companies from General Motors (GM) to Ford (F) to Volkswagen (VWAGY) are temporarily shutting down facilities, lacking the chips they need to manufacture more vehicles.
Even amid this slowdown in production, demand for automobiles remains high. And more importantly, the longer-term trend of vehicles becoming even more technology-reliant is here to stay, which means continued and growing demand for chips – great news for semiconductor stocks.
Here are five "auto chip" stocks to watch. Each of these semiconductor companies is exposed to the automotive sector. Thus, they have room to benefit in the months and years ahead as manufacturers work through the supply shortage and their products become ever more integral to the world's vehicle fleet.
Data is as of Oct. 25. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price. Analysts' average long-term growth rate expectations represents the estimated average rate of earnings growth for the next three to five years, and is courtesy of S&P Global Market Intelligence.
- Market value: $24.0 billion
- Dividend: N/A
- Analysts' average long-term (LT) earnings growth rate: 9.8%
When it comes to auto chip stocks, Renesas Electronics (RNECY, $6.16) is one that often flies under the radar, even though 52% of its revenues are strictly from the automotive sector. That's likely in part because RNECY is a Japanese company and its stock trades "over-the-counter" in the U.S.
But in the age of a global auto chip shortage, and amid an explosion in growth for chip-heavy vehicles, Renesas could become a more popular name.
Renesas Electronics is a global player not only in automotive semiconductors, but also in microcontrollers and processors. This combination of digital and analog products creates a one-stop solution for automakers looking for the technology to back their vehicles.
Its chips already power camera and battery systems for companies in the key German and Chinese markets. More applications for the technology are being developed – including creating higher-resolution rear-view cameras at a lower cost – which should expand RNECY's product portfolio in the next few years.
It's also a company that has been able to grow in the past year as many other companies facing supply shortages have started to falter. In its most recently reported quarter, adjusted earnings per share surged nearly 88% from the year prior. That has provided a lift to RNECY shares, which are up almost 40% in the past 12 months.
Those shares remain attractively valued, however, at 20 times forward earnings – considerably lower than the 25 forward P/E of the broader tech sector, according to Yardeni Research data.
- Market value: $6.3 billion
- Dividend: N/A
- Analysts' average LT earnings growth rate: 11.5%
II-VI (IIVI, $59.07) is a play on the rise of laser technologies. Today's lasers are integrated onto semiconductor chips, and where automobiles are involved, are a key part of lidar and other object-detection technology.
The company is currently putting the finishing touches on its roughly $7 billion merger with Coherent (COHR). The final deal is expected to create massive scale, which should help the combined entity better compete in the laser market.
"With COHR's laser capabilities, IIVI is among the most diversified companies in its space, with wide-reaching capabilities across end-markets that are only just beginning to benefit from long-term secular growth cycles," say Stifel analysts, which rate the stock at Buy.
They add that "higher expenses and the pending COHR merger will likely limit upside in shares over the near term" – indeed, shares are off 10% since the merger was announced in late March – but they "remain positive on the long-term outlook."
Translation: While this M&A event is impacting the stock now, it also might be presenting a buying opportunity for patient investors willing to wait out the turbulence.
And the company's role in the growing automotive space could make this a potential gem among chip stocks in the years ahead.
- Market value: $53.1 billion
- Dividend: 1.1%
- Analysts' average LT earnings growth rate: 28.4%
Headquartered in the Netherlands, NXP Semiconductors (NXPI, $200.29) manufactures a number of different products. Among them are application processors, communication processors and wireless and Bluetooth solutions.
As a global giant, it's no surprise that this is one of the key players for the tech trends of the next decade, including the increased technology going into automobiles. In fact, it's already noted as one of the largest auto chip stocks, with a double-digit percentage market share.
On the charts, NXPI has pulled back from its late-August highs. Weighing on the shares was insider selling by some company executives, as well as broad-market headwinds. Nevertheless, this selloff has created an opportunity to pick up a high-quality name at a discount. Adding to the argument for an attractive valuation: shares are currently trading at less than 18 times forward earnings.
The general consensus among analysts is that NXPI is a Buy – and with fairly high conviction, at that. Of the 29 pros following the stock that are tracked by S&P Global Market Intelligence, 13 say it's a Strong Buy, six call it a Buy, nine deem it a Hold and just one rates it at Sell.
For investors with a long-term outlook, this is also an appealing company thanks to the firm's growing dividend. While the yield is low at 1.1%, NXPI's dividend growth – it has more than doubled its payout since 2018 – could pay off for patient investors in the years ahead.
So while supply chain issues may impact some technologies, NXP's diversity will truly be its strength in the months and years ahead.
- Market value: $184.8 billion
- Dividend: 2.3%
- Analysts' average LT earnings growth rate: 11.1%
The company behind your high school graphing calculator has a lot more tricks up its sleeve. It's also one of the largest players in the automotive semiconductor industry. Texas Instruments (TXN, $200.20) plays a big role and looks set to continue being a leader among auto chip stocks.
Thanks to the rise of more technologically complex products from cars to calculators, the company has been on a tear. And a new report on the Machine Vision market that showcases the growth of machines like robots that need vision-guidance – a precursor to self-driving vehicles – highlights Texas Instruments as a notable player.
Another impressive feat? TXN has a fat 40% profit margin, the kind of margin that comes more from a software developer rather than a company that engages in physical manufacturing. These hefty profit margins combined with future growth trends from all tech, including automotive, should lead to years of outsized growth.
As with other big-name semiconductor companies, TXN can reward investors with dividend hikes over time. Shares currently yield 2.3% – a decent starting point for future growth.
And Wall Street pros are generally bullish toward Texas Instruments. According to S&P Global Market Intelligence, 31 analysts cover the stock, with an average rating of Buy.
- Market value: $59.1 billion
- Dividend yield: 0.6%
- Analysts' average LT earnings growth rate: 33.0%
Infineon Technologies (IFNNY, $45.42) is based out of Germany and makes chips for a number of automotive firms, including big European players like Volkswagen. And like other large, global semiconductor firms, the company's role goes far beyond just automotive chips.
Surging cases of the Delta variant of COVID-19 in Asia led many chipmakers – including IFNNY – to suspend some production. Yes, that is bad for the company's operations in the short term, but Infineon is still faring well on a long-term basis. Specifically, in its fiscal third quarter, the company reported a 25% year-over-year jump in revenues.
And while the share price declined alongside the broader market in September, it is up nearly 10% since its early October lows.
In the meantime, the two analysts following the U.S.-listed shares of IFNNY are steadfastly bullish on the chip stock, with both maintaining a Strong Buy rating. Plus, the average price target of $54.50 represents expected upside of 20% over the next 12 months or so.
Shares don't pay a huge dividend, but given the company's leading position in the European automotive market and the region's leadership in rising EV technology, this could be a surprising winner for U.S. investors in the years ahead.
A prolific financial writer, Andrew Packer has helmed newsletters on small-cap value investing, early-stage investments, special situations, short-selling, covered call writing, commodity investing, and insider trading, among others. He’s most proud of his 100% win rate on all trades in 2016.
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