Semiconductor Industry Set To Benefit From Global Chip Shortage

Semiconductor manufacturers such as Amkor Technology NASDAQ: AMKR, ON Semiconductor NASDAQ: ON and United Microelectronics NYSE: UMC are benefiting from strong demand for electronics gear, combined with a global chip shortage.

According to the Semiconductor Industry Association, chip sales grew 14.7% year-over-year in February, to $39.6 billion. As with just about every industry these days, the pandemic had an effect: Stay-at-home orders in 2020 drove demand for computers, tablets, monitors, headsets, speakers, connected exercise and kitchen equipment, and much more. 

All those items need chips. That led to the current supply squeeze, which is now affecting production of cars and electronics gear. 

That bodes very well for chipmakers. Not only are factories humming, but there’s an opportunity for future growth. However, chipmaking is a complex process, not suited to quickly opening up a new production line. That means it will take some time for supply to meet demand. Industry analysts see the crunch easing later this year. 

Tempe, Arizona-based Amkor produces chip packaging and offers testing services. Chip packages are the housing for integrated circuits. These packages are themselves complex and highly sensitive products. The constant challenge with these packages is to fit more interconnections into a smaller container. 

The company reports first-quarter results on April 26. Analysts expect earnings of $0.38 per share on revenue of $1.12 billion. If met, both would be increases over the year-ago quarter. Sales and earnings grew over the past five quarters, and the company beat estimates during that time. 

The stock has a spectacular year-to-date gain of 67.64%. Over the past year, it’s up 188.71%. Shares closed Wednesday at $25.24, down $0.38, or 1.46%. Trading volume was light, which is exactly what investors hope to see on a day when shares close lower.

Shares rallied to a multi-year high of $27.50 on Tuesday, so big investors may pare their positions somewhat before the next big uptrend. 

ON Semiconductor, based in Phoenix, designs and manufactures chips for a variety of functions within the automotive, industrial, medical, aerospace and consumer electronics markets. It was spun off from Motorola in 1999. One of the keys to ON’s growth has been acquisition of other chipmakers. 

The company has been profitable for many years, but earnings growth slowed in 2019 and 2020. That’s expected to change this year, with analysts eyeing earnings per share of $1.81, a year-over-year increase of 89%. 

For the current quarter, Wall Street expects earnings of $0.35 per share on revenue of $1.46 billion. ON topped earnings estimates for the past three quarters. 

The stock advanced 31.16% year-to-date and 235.92% over the past year. This month alone, it’s notched a gain of 3.17%, closing Tuesday at $42.93, down $0.64, or 1.47%.

The stock rallied to an all-time high of $44.59 in Tuesday’s session, then retraced some of those gains, to close in the middle of the session range. It’s extended above key moving averages, so a pullback with support at the 10-day or 50-day line may offer a new entry point. 

Taiwan-based United Microelectronics builds chips for enterprise customers in the automotive sector, as well as for those operating in the “Internet of things” segment, and for the industrial and cloud-computing markets. The company operates 12 factories, or “fabs,” throughout Asia. It also has operations in the U.S. and Europe. 

UMC issues monthly sales reports. It released March results Tuesday, showing a year-over-year gain of 14%. Shares rose slightly Tuesday, to $8.96, up by a nickel, or 0.56%. 

The company is expected to report earnings on or around April 26. It beat analysts’ estimates in the past three quarters. 

The stock has been consolidating below February’s multi-year high of $11.28. It’s currently finding support above its 10-day moving average, which is below its 50-day line. However, the 10-day line is moving higher and the two may soon converge. 

It’s a potentially bullish sign when a shorter-term average crosses above a longer-term line, as may soon happen in this case. That indicates heavier buying, which is pushing the price gradually higher. 

At this juncture, it’s prudent to watch the consolidation play out, to see what kind of formation takes shape. The current buy point is the previous high of $11.28, but an earlier opportunity may emerge.