One of the major stories over the past couple of months is the semiconductor shortage. This has been a persistent problem for a variety of industries such as computer hardware, automakers, and home appliances.

According to Susquehanna Financial Group, semiconductor lead times have increased to 18 weeks from 13 at the start of the year. Another indication of tight supply is many companies raising prices with the latest example being Taiwan Semiconductor increasing prices by 20%.  

While the tight supply conditions of the chip industry have negative implications for many industries, it’s certainly positive for chip stocks. We’ve already seen impressive gains in many names as the VanEck Vectors Semiconductors ETF (SMH - Get Rating) is up 14.5% since mid-May, while one of the leading chip companies – NVIDIA (NVDA - Get Rating) is up by more than 40%. However, going forward I expect some of the laggards in the industry to outperform, such as Semtech (SMTC - Get Rating), Diodes (DIOD - Get Rating), and Amkor Technology (AMKR - Get Rating).

Semtech (SMTC)

SMTC designs and manufactures semiconductor products that are used in various industries including networking, cloud computing, communications, and industrials. Its mixed-signal and analog semiconductor products can be categorized into four segments – Signal Integrity, Protection, Wireless and Sensing, and Power and High- Reliability. 

The company has partnered with several high-profile companies and organizations such as Amazon (AMZN) and the US Department of Defense. This is a testament to the quality of its products and management.

Like most semiconductor stocks, it’s benefitted from industry conditions as its last earnings report showed a 51% increase in earnings and 28% revenue growth compared to 2020’s fiscal Q1. The company noted growth in all categories and is also benefiting from the 5G upgrade cycle. 

SMTC’s POWR Ratings reflect this bullish outlook as it is rated a B which translates to a Buy rating. B-rated stocks have posted an average annual return of 19.7% which compares favorably to the S&P 500’s annual 7.1% gain. 

The POWR Ratings also evaluates stocks by components. Thus, it’s not surprising to see that SMTC has a B for Growth given that analysts are expecting 18% earnings growth and 23% sales growth over the next 12 months. To see more of SMTC’s component grades, click here.

Diodes (DIODE)

DIOD is a manufacturer and supplier of products within the discrete, logic, analog, and mixed-signal semiconductor markets. These products include diodes, transistors, and rectifiers, and it sells to the consumer electronics, computing, communications, industrial, and automotive markets, among others.

In its last quarter, DIOD had its fourth straight quarter of topping earnings estimates. It reported $0.93 in earnings per share, while analysts were looking for $0.78 per share. Revenue also beat expectations by 3% and was a 47% increase from last year. This strong earnings growth means that share prices are quite undervalued given its forward PE of 16.5.

Wall Street analysts also have a positive view of the stock given its consensus price target of $85.80 which implies a 10% upside. Analysts have also hiked earnings estimates by a significant amount this year due to this outlook. 

The POWR Ratings also reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. It has an A grade for Value which isn’t surprising given that it earns healthy margins while being cheaper than the S&P 500. To see more of DIOD’s component grades, click here.

Amkor Technology (AMKR)

AMKR provides outsourced semiconductor packaging and test services with operations across the world. It serves primarily integrated device manufacturers, fabless semiconductor companies, original equipment manufacturers, and contract foundries. The company offers turnkey packaging and test services that include semiconductor wafer bump, wafer probe, wafer back-grind, package design, packaging, and test and drop shipment services.

Since AMKR’s customers are other semiconductor companies, it’s not surprising that it’s thriving. The shortage in semiconductors is leading to hundreds of billions of investment in new production capacity which should further boost AMKR’s revenues. 

In its last quarter, AMKR reported record Q1 sales of $1.3 billion, a 15% increase from last year. Gross margins and operating margins also expanded to 20% and 10.9%, respectively. Despite this strong growth, AMKR has an attractive valuation with a forward P/E of 10.9. 

AMKR’s POWR Ratings reflect this bullish momentum as is rated a B which translates to a Buy. AMKR is above average in terms of growth and value with a B and an A in each category, respectively. This makes it one of the most intriguing stocks in its sector.

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This article was written by Jaimini Desai, Chief Growth Strategist for StockNews.com.  Jaimini has been dialed into the hottest trends in investing:

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NVDA shares were unchanged in after-hours trading Thursday. Year-to-date, NVDA has gained 47.20%, versus a 14.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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