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The semiconductor sector continues to experience tremendous growth, and trends suggest a lot more of the same in the years ahead. The weakness is key stocks is an opportunity.
A new report released on Friday from Deloitte predicts worldwide semiconductor sales will surpass $600 billion in 2022 for the first time as chips become ubiquitous across all sectors.
It’s a big opportunity for Lam Research (LRC
The global economy is in the throes of a major chip shortage. Computer processors have become commonplace in everything from appliances and automobiles, to the next generation factories where those items are built. To make these chips at scale manufacturing is now mostly farmed out to massive contractors like Taiwan Semiconductor and Manufacturing (TSM). The unintended consequence of this consolidation is factories are concentrated in Asia, and capacity is tight.
When Ford (F), General Motors (GM), Toyota (TM) and others automakers cut orders in 2020 as the global pandemic spread, firms like Apple (AAPL), Nvidia (NVDA)and Advanced Micro Devices (AMD) stepped in to fill the void. The automakers, and their orders, moved to the back of the cue.
During the course of 2021 that miscue may have cost the auto sector $210 billion, according to the note from Deloitte. And the legacy automakers are nowhere near being out of the woods.
As the sector races toward electric propulsion Gina Raimondo, Commerce Secretary in the Biden Administration, says carmakers will need even more microcontrollers and microprocessors. Whereas internal combustion engine-powered vehicles may rely on two hundred chips, she claims a typical EV will need ten times as many chips, according to remarks posted at the U.S. Department of Commerce.
Chip contractors are getting ready by building new capacity all over the globe at breakneck pace.
Intel (INTC) executives announced on Friday a plan to build a new $20 billion facility in Ohio. The project could swell to $100 billion and augments the construction of a pair of new facilities under development in Chandler, Ariz.
Taiwan Semiconductor is also building new factories in Arizona. When its Phoenix facility comes online in two years it should help the Taiwanese company add to its staggering lead in contract chip manufacturing.
TSM is responsible for 24% of the world’s semiconductor output. And the company makes 92% of all high-end chips, including those used in iPhones, game consoles, data centers and 5G radio towers.
Lam Research doesn’t make chips. The Fremont, Calif.-based company makes the equipment used to manufacture chips. As the leading supplier of these machines and processes, Lam works with all of the biggest chip makers, including TSM, Intel and Samsung.
Investors should understand what is happening: The entire world is racing to build chip making capacity. This is a long, expensive process that is being tempered by rising demand and politics. From China to Europe and the United States, the public sector is investing billions in chip-making infrastructure to ensure regional access. The goal is to prevent a repeat of the shortages that crippled the auto sector in 2021.
A $52 billion bill pushed by Raimondo in June passed in the Senate. It is now working through the House of Representatives.
Public sector investment, and structural growing demand for semiconductors is a big part of the reason Deloitte is so bullish on the industry. Their analysts predict this growth trend will persist well into 2030.
Companies like Lam Research are the direct beneficiaries.
At a price of $605 shares trade at only 16.4x forward earnings and 5.5x sales. The stock has fallen from a high of $730 in early January despite upgrades this year from Barclays, Bank of America Merrill Lynch and Jefferies.
According to FactSet data published at Barron’s, the average 12-month price target for the 28 analysts who cover Lam shares is $752.57, or 24.3% above current levels. Given the political rush to build new infrastructure that target may be low.
Longer-term investors should consider buying Lam into the current weakness.
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