The sell-off in chip stocks on supply worries is overshadowing reasons to buy them, says Bank of America
Semiconductor stocks have been yanked lower recently on worries about a shortage of chips worldwide but likely annual growth in auto production and in smartphone shipments are among the reasons Bank of America said it still sees buying opportunities in the space.A shortage of chips, largely stemming from production shutdowns and business restrictions resulting from the COVID-19 pandemic, has affected a wide range of companies, including Ford Motor which has said some of its factory work will be interrupted.
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"Media reports are chock-full of news of chip shortages leading one to incorrectly believe the semis industry has shut down and gone on a holiday," said analysts led by Vivek Arya.
It noted that the iShares PHLX Semiconductor ETF, which tracks the performance of shares in 30 semiconductor companies, has dropped more than 7% since its recent peak on April 5 and has underperformed gains in the S&P 500 and industrial stocks.
But the analysts also expect auto production to accelerate to 10% year-over-year growth in 2021, followed by an expansion of 9.7% in 2022, and estimate shipments in smartphone to accelerate to 8% to 10% growth this year, including a doubling of 5G smartphones to at least 500 million units.Growth in PC shipments is also likely to exceed 15%-20% year-over-year. "Furthermore, vendor focus on engaging in non-cancellable, non-returnable (NCNR) orders for 2022 should enhance long-term visibility," said BofA. Applied Materials, Lam Research and KLA-Tencor, the three largest vendors in the US, are trading at a 20 times forward price-to-earnings ratio, "compelling given their multi-year, highly profitable growth visibility," the bank said.
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