• Fears of a global semiconductor shortage have punished the PHLX Semiconductor Sector Index.
  • But Bank of America analysts believe there is still a bullish case for semicap and gaming stocks.
  • They think 7 semiconductor companies are well-positioned for the semi shortage. 
  • See more stories on Insider’s business page.

When the pandemic forced large portions of the population into quarantine, it exposed a slew of problems in global supply chains. Shortages of masks, cleaning products, and

toilet paper
, among other goods, dominated the headlines as companies struggled to keep their supply channels from collapsing. 

Thankfully most people can get their hands on triple-ply these days, but there’s still one product in short supply that’s causing headaches for a wide range of industries: semiconductors. 

A shortage of these small chips are a big problem for companies like Ford, Sony, Apple, and others that rely on semiconductors to power their products. And as the shortage appears likely to continue for the foreseeable future, investors have been running for the exits. 

The PHLX Semiconductor Sector Index, or SOX, is down 5.85% from its peak on April 5, while the S&P 500 is up 3.75% during the same period. In a recent client note, a team of Bank of America analysts led by Vivek Arya wrote that there are a number of reasons for the semiconductor sell-off, including the perception that concerns over a semiconductor shortage will constrain any upside this year, rather than driving pricing power. 

In addition, the analysts wrote that “tougher year-over-year comparisons heading into the second half of 2021 and calendar-year 2022,” as well as “continued rotation into value/cyclicals and away from crowded growth stocks, with emerging concerns around the impact of rising US tax rates” are contributing to the sell-off. 

While the Bank of America analysts admit these issues facing the semiconductor industry are no joke, they see opportunities for investors to profit from companies operating at either end of the semiconductor supply chain. 

At one end are the semiconductor capital equipment manufacturers, or semicap companies. These are the companies that build the machines that put together semiconductors circuit by circuit, and they are key suppliers for the biggest semiconductor companies in the industry.

Arya and his team believe that semicap companies will directly benefit from chip shortages as semiconductor companies ramp up production to meet demand. And as semiconductors become increasingly complex and sophisticated, there will be a parallel increase in the costs of manufacturing, which will pad semicap companies’ bottom lines. 

On top of all that, President Biden’s recent executive order intended to protect and improve US supply chains will mean increased domestic semiconductor production, and therefore more business for semicap companies. 

As for the other side of the supply chain, in a separate note Arya and his team wrote that some specialized chipmakers will not only survive but thrive during the semiconductor shortage. They’re particularly bullish on companies that make graphics processing units, or GPUs, for gaming PCs. 

Arya’s team thinks that the consoles released by Sony and Microsoft late last year have set a new standard for mainstream gaming performance. But according to a monthly survey conducted by the digital gaming platform Steam, a large portion of gamers still play PC games using GPUs that underperform the new consoles. 

Arya believes that the new, higher standards set by consoles will spur on upgrades among PC gamers, which will in turn allow the chipmakers to charge higher average selling prices for their GPUs. These strong product cycle tailwinds should boost the performance of PC gaming chip stocks.  

On one end of the supply chain are the companies that make semiconductor manufacturing equipment, while on the other end are the companies that sell an extremely specific product to a relatively small subset of consumers. Both sets of companies are specialists operating on the outskirts of the core semiconductor industry, which will allow them to continue to outperform even during a global semi shortage.

Between the two notes Arya and his team picked five semicap companies that they believe will profit from a semiconductor shortage, as well as two gaming chipmakers. Those seven stocks are listed below, along with the Bank of America analysts’ price objectives, how they arrived at their target prices, and what the risks are for each of the stocks.



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