Yahoo Finance Biden Mulls Bold Steps to Curb Chip Shortage: 3 Stocks in Focus
An acute shortage of semiconductor chips, which are the building blocks for various electronic gadgets, telecommunication equipment, and automobile manufacturing, has set alarm bells ringing in the higher echelons of the government, prompting the administration to consider using an aggressive stance to address the issue. Despite the best efforts of the Biden administration to increase domestic production, the demand-supply imbalance has virtually crippled operations of various related sectors and largely affected profitability due to inflated equipment prices. The government is now seeking to take the bull by the horn to tackle the worsening situation that has affected thousands of U.S. workers and forced automakers like Toyota Motor Corporation TM and General Motors Company GM to slash output and sales forecast.
What Ails the Chip Manufacturing Industry?
The global chip shortage has been largely triggered by the COVID-19-led constraints on the supply chain mechanism and increased demand for electronic gadgets due to an uptick in pandemic-induced nesting activities. It was also aggravated by the disruptions in production due to inclement weather conditions and natural catastrophes. Critics further allege that the initial seeds of the chip shortage were sown in 2018 with the imposition of tariffs and restrictions on Beijing by President Trump and that the problem was brewing within.
Policy Shift With Change in Power
While the Trump administration primarily focused on ‘technology decoupling’, which enforced strict export restrictions based on national security grounds, President Biden seems more inclined toward the "small yard, high fence" strategy. This policy aims to take a more proactive approach in defining technologies that are essential to American national interests and employ stringent protective measures. Instead of an outright trade ban that largely affects the supply-chain mechanism, it intends to identify the source of the bottlenecks behind a product shortage and work in tandem with the industry to fix it so that the business interests of domestic firms are not harmed. In tune with this policy shift, the President had inked an executive order in February 2021 to launch a 100-day review process of the supply chain mechanism to address the global shortage of semiconductor chips and devise ways to increase domestic production while eliminating dependence on China.
The government further introduced the Chips for America Act, which aimed to provide $52 billion for semiconductor research and development, as various reports revealed that global semiconductor manufacturing capacity in the United States fell from 37% in 1990 to about 12% at present owing to a dearth of federal investments in chip research. Although the Senate passed the bill in June 2021, the legislation is yet to be approved by the House, likely robbing the beleaguered industry of an opportunity to spearhead innovation and fast-track production facilities.
Aggressive Stance in the Making?
The chip shortage is leading to panic buying by some OEMs, which, in turn, is escalating prices. This has largely affected the smaller manufacturers that lack the firepower to match higher raw material costs and are forced to either halt production or make way with some relatively weaker substitutes. In order to tide over the storm, the U.S. Commerce Department is currently seeking supply-chain data from industry participants within the next 45 days on a voluntary basis in order to ease production bottlenecks and identify potential pitfalls of chip hoarding. However, companies have reportedly been dragging their feet on handing over this sensitive data, forcing the Biden administration to consider flexing its muscles by invoking the Defense Production Act that could force companies to turn over that information. The defense law vests the President with additional powers to allocate resources and production and might be called into force to bridge the demand-supply gap.
3 Semiconductor Chip Manufacturing Firms in Focus
Amid such a scenario, semiconductor manufacturing firms are likely to hog the limelight in the near future with continued demand trends fueling solid long-term growth potential. From the list of such firms, we have cherry-picked three stocks with strong fundamentals, carrying either a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Applied Materials, Inc. AMAT: Headquartered in Santa Clara, CA, Applied Materials is one of the world’s largest suppliers of equipment for the fabrication of semiconductor, flat panel liquid crystal displays, and solar photovoltaic cells and modules. The company’s semiconductor business continues to be on the growth trajectory with significant design wins. Moreover, the company's AI Design Forum bodes well for its strong focus toward the development of new computing materials and designs. The industry's transition to 3D NAND is also helping Applied Materials to further expand the served available market. With a long-term earnings growth expectation of 19.4%, the stock delivered an earnings surprise of 8.1%, on average, in the trailing four quarters. This Zacks Rank #2 stock has gained 142.3% over the past year. The Zacks Consensus Estimate for current-year earnings has been revised 48.4% upward over the past year, and that for the next year is up 46.6%.
Image Source: Zacks Investment Research
Skyworks Solutions, Inc. SWKS: Headquartered in Irvine, CA, Skyworks manufactures and markets a broad range of high-performance analog and mixed-signal semiconductors that enable wireless connectivity. As demand for mobile Internet applications is exploding with the broad proliferation of smartphones, net books, notebooks, caplets, and other forms of embedded wireless devices and faster pace of 5G deployment, Skyworks continues to gain traction. High quality, environment-friendly products, and sustainable business practices have been the key differentiators for the company. Skyworks is also aggressively expanding into new vertical markets. It has introduced connected-car solutions for prominent Japan-based and Korea-based automotive OEMs along with Daimler. With a long-term earnings growth expectation of 19.4%, the stock delivered an earnings surprise of 21.4%, on average, in the trailing four quarters. This Zacks Rank #2 stock has gained 25.6% over the past year. The Zacks Consensus Estimate for current-year earnings has been revised 53.2% upward over the past year, and that for the next year is up 48%.
Image Source: Zacks Investment Research
Qorvo, Inc. QRVO: Headquartered in Greensboro, NC, Qorvo is a leading provider of core technologies and radio frequency solutions for mobile, infrastructure, and aerospace/defense applications. With a broad product portfolio, Qorvo is likely to create new growth opportunities and spearhead technological innovation for the overall benefit of carriers and consumers. The company has introduced highly integrated front-end solutions that simplify and accelerate the implementation of multimode, multi-band 4G smartphones and tablets. These new RF Fusion front-end solutions showcase the company's ability to help leading OEMs to quickly launch their next-generation flagship devices. With a long-term earnings growth expectation of 12.7%, the stock delivered an earnings surprise of 14.2%, on average, in the trailing four quarters. This Zacks Rank #1 stock has gained 38.6% over the past year and has a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has been revised 47.6% upward over the past year, and that for the next year is up 35.4%.
Image Source: Zacks Investment Research
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Toyota Motor Corporation (TM) : Free Stock Analysis Report
Skyworks Solutions, Inc. (SWKS) : Free Stock Analysis Report
Applied Materials, Inc. (AMAT) : Free Stock Analysis Report
General Motors Company (GM) : Free Stock Analysis Report
Qorvo, Inc. (QRVO) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
