The global chip shortage does not appear to be going anywhere. And it’s interrupted some big rallies in key stocks.
The question is whether the hot stocks that have cooled off present buying opportunities. In some cases, they do.
After all, the chip shortage should be a relatively short-term phenomenon, even if “short-term” is measured in months or even years rather than weeks. Already, foundries are racing to ramp capacity. Most notably, Taiwan Semiconductor (NYSE:TSM) has pledged as much as $28 billion in capital expenditures this year.
In other cases, however, the impact will linger — even if the chip shortage itself doesn’t. Some lost sales may not come back. Other growth trends may be paused — which matters, particularly for stocks where rallies had priced in steady and steep growth going forward.
So, with this chip shortage upon us, here are seven stocks that investors need to keep a close eye on:
- Qualcomm (NASDAQ:QCOM)
- Advanced Micro Devices (NASDAQ:AMD)
- General Motors (NYSE:GM)
- Tesla (NASDAQ:TSLA)
- QuantumScape (NYSE:QS)
- Nio (NYSE:NIO)
- Enphase Energy (NASDAQ:ENPH)
Stocks to Watch on the Chip Shortage: Qualcomm (QCOM)
Qualcomm is dealing with a perfect storm at the moment, and it doesn’t have much ability to respond.
The problem is that Qualcomm is a so-called “fabless” chip maker. In other words, it doesn’t actually manufacture the chips it designs.
In normal times, that strategy makes some sense. Notably, Qualcomm’s capital requirements are far lower than they would be otherwise.
Of course, these are not normal times. Qualcomm’s foundries already are running at full capacity, leading to a worldwide shortage of Qualcomm chips. But that’s not even the only problem.
The ban on Chinese smartphone manufacturer Huawei created big market share gains for Qualcomm customers worldwide — unquestionably a good thing for Qualcomm and for QCOM stock. But at the moment, it’s adding demand while supply remains limited.
Meanwhile, the freeze in Texas hit a Samsung (OTCMKTS:SSNLF) foundry that produces Qualcomm chips. That only exacerbated supply problems.
The good news for Qualcomm is that current problems are largely short term, while the demand drivers seem likely to persist over the long haul.
Investors seem to be figuring that out somewhat, as QCOM stock has seen a bounce in recent sessions. The question is whether the stock ran too far to begin with, but a 17x forward price-to-earnings multiple hardly seems out of line. Chip bulls might well see this pullback as a buying opportunity.
Advanced Micro Devices (AMD)
The story at AMD is somewhat similar. AMD, too, is a fabless chip maker. And it, too, is seeing shortages as a result.
But there is one big difference: competition. A big reason for the massive rally in AMD stock (it traded below $2 barely five years ago) has been its ability to catch up to rival Intel (NASDAQ:INTC).
But Intel is not fabless. In fact, it’s moving aggressively into the foundry business itself.
So the chip shortage gives Intel a big near-term competitive edge. But the worry for AMD stock is that the rival’s near-term edge will have a long-term impact. Intel is getting a bit of a reprieve from its own execution problems that have allowed AMD to catch up.
Add in the pressure on the automotive business at Xilinx (NASDAQ:XLNX), which AMD is acquiring for $35 billion, and it’s not surprising AMD stock has struggled so far in 2021. A 10% decline year-to-date doesn’t seem like much, but the Philadelphia Semiconductor Index is up 18%.
AMD’s underperformance might last a bit longer — at least until we have more clarity on when and how the chip shortage is ending.
General Motors (GM)
The industry facing the biggest impact from the chip shortage has been the automotive industry. GM has not been exempt.
Indeed, there’s been a steady drumbeat of negative news from the company. Two plants were shuttered in early February; midsize pickup trucks were paused in March. Now, overtime has been cut at two more plants that make full-size pickups, GM’s most profitable product.
Of course, it’s not really ICE (internal combustion engine) pickup trucks that have fired up investors in recent months. Rather, it’s GM’s transition to electric vehicles.
That transition could be interrupted if the chip shortage lasts for some time. And it might. The problem with carmakers is that they moved to a “just in time” operating model, which avoids building up inventory of key components. Suppliers then slashed production in 2020 amid the novel coronavirus pandemic. GM and other American manufacturers are thus left with no chips on hand, pressured production, and rising demand across product lines as normalcy returns.
So far, investors don’t seem too worried. GM stock is only modestly off its all-time high. But the big rally since November at least has stalled out, and it’s possible the chip shortage could lead to a stumble if it continues to pressure GM.
Tesla stock has pulled back by about a quarter since late January. The chip shortage isn’t necessarily the main driver, but it likely hasn’t helped.
After all, TSLA stock had valuation concerns to begin with. And the rise of new competition from GM, Volkswagen (OTCMKTS:VWAGY) and so many other legacy manufacturers represents a potential risk.
But it does seem like the chip shortage led to a pause of Model 3 and Model Y production back in late February. And while Tesla’s delivery numbers for the first quarter were nicely ahead of Wall Street estimates, those forecasts also had come down precisely because of the shortage.
Given Tesla’s leadership in EVs, the chip shortage probably will have minimal impact long-term. But given a stock that clearly was priced for perfection, it might have been enough to at least contribute to the current pullback.
The same seems true for shares of battery developer QuantumScape. Long-term, the chip shortage isn’t going to stop the growing adoption of EVs. Short-term, it will have an impact.
And QS stock, even after pulling back from December highs, wasn’t priced for any kind of negativity. Those December highs look awful bubbly in retrospect; even now, the company has a market capitalization of nearly $16 billion and minimal revenue.
Of course, QuantumScape easily can grow into that valuation. The good news for QS stock long term is that it’s a play on EV adoption — no matter who the manufacturing winners are. The bad news right now is that the chip shortage might be pushing EV adoption out a few months, and investors aren’t showing much patience.
The chip shortage has made its way to China. It may be even more persistent there. Obviously, that’s bad news for Nio stock.
Indeed, one estimate has said it may take the country a decade to resolve its automotive chip shortage. There are too many manufacturers, too few fabs, and limited ability to import the needed chips and materials such as substrates.
Like some other EV plays, NIO stock may have run too far to begin with. But the chip shortage likely has added to the selling pressure. This may not be an issue that gets resolved any time soon — which means that NIO stock may struggle to bounce back any time soon.
Enphase Energy (ENPH)
Enphase Energy has been one of the best stocks in the entire market of late. In 2019, the ENPH stock price rallied 452%. That performance was topped last year with a 571% gain.
Incredibly, ENPH closed 2016 at $1.01. It touched $229 in February.
So some kind of pullback might have happened anyway. But it’s possible the chip shortage provided a catalyst to the downside.
The good news is that Enphase management believes the shortage will be worked through in relatively short order. And valuation has come in with ENPH down about one-third from those highs. At 55x forward earnings, with years of growth still ahead, solar bulls should keep a close eye on ENPH stock.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.