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.
"To be sure, there are spot shortages in areas such as substrates, microcontrollers, image sensors, parts of memory and lagging edge processors," said Bank of America said about the semiconductor sector in a note published Tuesday.
But the investment bank reiterated its buy rating on Applied Materials, its top pick, as well as on KLA-Tencor, Lam Research, Nova Measuring Instruments and Teradyne, saying while there are shortage issues in the sector that growth concerns are overstated.
"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.
"Strong [financial results] beats/outlooks have been received with stock selloffs, suggesting four walls of concerns," including that the widespread chip shortage is now being perceived as constraining calendar year 2021 upside as opposed to driving pricing power.
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.