If there is one thing in this world that investors have grown accustomed to, it is a plentiful supply of semiconductors, especially in an age in which they are used in so many different applications, from computers to cars to just about everything. Well, the day has arrived that shortages are being felt and are causing some severe problems across many industries.
In a new Jefferies report, outstanding semiconductor analyst Mark Lipacis notes that, after conversing with supply chain experts and conducting in-depth channel checks, the current shortage of chips is the worst in 30 years and lead times for product delivery have been stretched way out. There is so much demand that some original equipment manufacturers (OEMs) are taking drastic measures for inventory. The report noted this:
OEMs are paying high prices to procure chips, and many are concerned that the component shortage will cause them to shut down factories. One OEM paid a high expediting fee to get parts in 39 weeks, instead of 52. OEMs are concerned that the component shortage would shut down their factories. One OEM placed a “blank check” order, with the quantity and pricing blank, leaving it to the reseller to fill in the quantity and pricing required to procure chips.
The analyst also said this about why the shortage is so intense:
Supply chain expert, Richard Kwartek attributed the hefty undersupply to a “perfect storm” of factors: 1) fire at a Renesas factory in Japan, 2) cold weather shutting NXP semiconductor and IFX fabs in Texas, 3) drought in Taiwan (3000-10000 gallons per day required for large semi factories, 4) poor OEM forecasting during COVID, 5) transportation shortage, 6) low inventories, 7) substrate & packaging paper shortage, and 8) sudden improvement in demand.
Four semiconductor stocks are favored at Jefferies, and all have Buy ratings. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
This stock could very well continue to benefit from the increase in information technology and 5G spending. Analog Devices Inc. (NASDAQ: ADI) is a leader in the design, manufacture and marketing of analog, mixed-signal and digital signal-processing integrated circuits for use in industrial, automotive, consumer and communication markets worldwide.
The company offers signal-processing products that convert, condition and process real-world phenomena, such as temperature, pressure, sound, light, speed and motion, into electrical signals.
Analog Devices has among the best end-market exposure, with high communications and aerospace/defense market exposure, in addition to offering investors a powerful 5G content growth story. Plus, acquisitions over the past few years like Linear Technology and Hittite Microwave should provide revenue and additional cost synergies that are still coming.
Investors receive a 1.74% dividend. The Jefferies price target for the shares is $188. The Wall Street consensus price target is lower at $182.62. Analog Devices stock closed Wednesday trading at $158.46 per share.