Chip stocks are hot as supply runs short

Computer chip makers are booming as digital takes over, writes Sam Benstead

Aglobal shortage of computer chips – which last week forced Jaguar Land Rover to halt car production – is proving a boon for the firms that build the electronics that power our gadgets.

Shares in chip makers have risen by 68pc over the past 12 months, more than double the 32pc return for global stocks. Investors have re- evaluated their importance to the world economy amid surging demand and rising prices.

But the best is yet to come for chip stocks, according to fund managers. As our lives become more digital and increasingly reliant on computers, demand for the tiny chips, which do the thinking inside a computer, would keep rising, they said.

Tammy Kiely of Goldman Sachs, the investment bank, said the supply crunch had arisen because chip makers had cut back on production last spring, when orders from their customers plummeted as the pandemic struck. Now that pent- up demand has been unleashed, chip makers are struggling to keep up.

“This shortage can’t be solved overnight as it takes at least two years to build and start up a new factory, so prices are starting to go up,” she said.

William de Gale, manager of the BlueBox Global Technology fund, holds 40pc of his portfolio in chip companies and said they were one of the best investment areas in the technology sector.

“All technology needs computer chips to function. This is great for chip makers and companies along the chip supply chain as demand is soaring,” he said.

He argued that the best opportunity lay in companies that made the equipment needed to manufacture chips as investment in new factories was ramping up to meet demand.

He pointed to American firms Applied Materials and Lam Research as good bets. ASML, a Dutch company that has a monopoly on a particularly complicated chip input that uses lithography, was another, he said.

Mr de Gale’s favourite chip maker is Taiwan’s TSMC, the world’s largest, which makes processors for Apple’s iPhones. “It has just announced $100bn [£72bn] in investment to keep up with demand and is extremely good at running large factories. Intel will never be able to catch up with it,” he said.

Even after their share price rally, Mr de Gale argued that chip stocks were not expensive given how much demand would grow in the future.

“Applied Materials trades at a priceto-earnings ratio, which measures how much shares cost relative to profits, of 22 times, which is similar to lowergrowth companies such as Unilever, owner of brands such as Marmite and Dove,” he said.

ASML shares trade at 45 times earnings, which Mr de Gale said was not expensive given the quality of its technology and the steady income it would make from selling chip parts.

Lewis Grant, a fund manager at Federated Hermes, agreed. He said even though shares in TSMC had doubled over the past year they were still underpriced because it was increasing revenues by double-digit percentages every year and had a technological advantage over competitors.

Will Lam of Invesco, the investment manager, said another cheap option was AsusTek, a Taiwanese chip maker that pays a hefty dividend and currently yields 6.8pc. “It has loads of cash at hand and lots of ‘ hidden value’ from investments in other companies, including ASMedia, a group that supplies other chip makers,” he said.

One potential drawback of buying

chip companies, or owning them via a fund such as the VanEck Vectors Semiconductor Ucits ETF, is that, as the past year has proved, supply and demand can be volatile.

Even without the effects of a pandemic, launches of new gadgets such as iPhones can have a big impact, raising the risk of a glut of supply, and lower prices, in more fallow periods.

But Mr de Gale said the chip-making industry, which now consisted of fewer but larger companies, was currently, barring pandemics, better at forecasting jumps in demand from the launch of new products.