3 stocks to buy before a possible token shortage

The consulting group Bain & Company recently published a comprehensive report on the state of technology, which included the prediction of a possible shortage of chips in the coming years. That shortage could emerge as demand for the semiconductors needed to build today’s artificial intelligence (AI) infrastructure continues to grow, combined with the potential for an upgrade cycle for smartphones and PCs.

Given the comments from major tech companies involved in building AI infrastructure and the exponential need for more computing power from AI models, combined with the need for more powerful smartphones and PCs to run AI applications, it certainly seems that there is a high demand for chips. coming in the future. At the same time, increasing chip manufacturing capacity takes time, taking years to build a new foundry.

As such, this prediction doesn’t seem like much of a stretch. Let’s look at three stocks that could benefit from a chip shortage.

Nvidia

Graphics processing units (GPUs) from Nvidia (NASDAQ: NVDA) are the most sought after semiconductor chips on the market today. Its chips are used for training AI models and inference in data centers, and their demand is currently insatiable. If there is a chip shortage in the coming years, you can bet that demand for Nvidia chips would be partly responsible.

The company currently holds over 80% market share in the GPU space. Nvidia created a wide moat with its CUDA software platform, which long ago became the standard by which developers programmed GPUs and is what most developers were trained to use. At the same time, it has accelerated its development cycle for GPUs from two years to one to ensure it remains at the technological forefront.

If there is an imminent shortage of chips, it would prove that the declining case against Nvidia, that demand will slow after an initial burst of spending on AI infrastructure, is likely to fall. At the same time, a shortage of chips likely gives Nvidia even more pricing power than the considerable amount it already has.

As an added bonus, Nvidia stock is relatively cheap, trading at a forward price-to-earnings (P/E) ratio of only about 31 based on next-year analyst estimates and a price-to-earnings-growth (PEG) ratio of about 0.8 . A PEG below 1 is usually considered undervalued, and growth stocks often have PEGs well above 1.

Taiwanese semiconductor manufacturer

As the largest semiconductor manufacturer in the world, Taiwanese semiconductor manufacturer (NYSE: TSM)or TSMC for short, makes more chips than any other company. If there is a chip shortage, it means that demand for its services would be strong and foundries (chip manufacturing facilities) would likely be operating at or near capacity.

The story continues

Semiconductor manufacturing is a high-fixed-cost business, so high demand and capacity utilization are a must to keep margins high. A tight supply and demand environment also increases pricing power. TSMC has already driven up prices for its newer chip manufacturing processes in recent years, and the company is expected to raise prices nicely next year as well. A very tight bid-ask environment will only increase the buyer’s prices.

A chip shortage caused by high demand also means a need for more capacity, which TSMC is trying to increase. Build new factories in the United States, Japan and Germany. However, new factories are not built overnight and may take several years to build. So if there’s a shortage of chips, that means its new fabs will likely ramp up to capacity pretty quickly once they come online. The company is also working to reduce chip sizes. While this benefits chip designers with lower power consumption and higher speeds, it also allows for more chips on a wafer, increasing capacity.

With AppleNvidia and AMD as its biggest customers, TSMC would benefit from continued AI infrastructure spending and a hardware upgrade cycle.

Ultimately, though, if there is a chip shortage, as the world’s leading semiconductor maker, the company would likely play a big role in being part of the solution to the shortage.

TSMC stock is also attractively priced, with a forward PE of 22 based on next year analyst estimates and a PEG of around 1.

ASML

If there is a short shortage due to a lack of capacity, it means that chipmakers will need to increase capacity, and to do so, they will need more equipment used to make chips. And the leading company in semiconductor manufacturing equipment is the Netherlands. ASML (NASDAQ: ASML).

The semiconductor manufacturing business is a non-global one, and ASML is currently in the midst of a more transitional year as the industry digests the current supply of certain memory and logic chips. Some of this comes from weaker smartphone and PC sales, but if AI leads to a refresh cycle as more powerful hardware is needed to run AI applications, then some of these markets should improve.

Meanwhile, the company recently introduced a new high numerical aperture extreme ultraviolet lithography system, or high NA EUV, to help improve chip manufacturing productivity and reduce manufacturing costs. It shipped the second of these systems in Q2 and said interest in the expensive new system is high.

ASML expects an industry revival in 2025, and any chip shortages would likely increase demand for its equipment.

As with Nvidia and TSMC, ASML trades at an attractive valuation. Based on analyst estimates in 2025, the forward P/E is 26 and the PEG is 0.8.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Apple, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

3 Stocks to Buy Ahead of a Potential Token Shortage was originally published by The Motley Fool