Semiconductor Stocks: 2022 Outlook For Chip Companies

The outlook for global semiconductor sales in 2022 is positive as demand remains strong for chips for computers, smartphones, automobiles, and other products. But supply constraints will cap growth for semiconductor stocks again this year, analysts say.

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Still, forecasts are largely upbeat about the sector. Consulting firm Deloitte is forecasting semiconductor sales to grow 10% to more than $600 billion in 2022. That’s after rising 25.6% in 2021 and 6.8% in 2020, according to World Semiconductor Trade Statistics.

The revenue growth this year will come from a combination of price increases and modestly higher production, said Brandon Kulik, principal in Deloitte’s Technology, Media & Telecom industry practice. Chip shortages stemming from limited production capacity will continue to be a major story in 2022, Kulik said.

“With the semiconductor shortage, the industry is getting more media attention than it’s ever gotten,” he said.

“There will be some more capacity coming online this year but that’s just chipmakers doing more with what they have,” Kulik said. “It’s not going to be enough. That’s why we see the shortages lasting beyond this year.”

The supply problems won’t be truly solved until new factories begin operation in two or three years, he added.

Growth Headwinds For Semiconductor Stocks

The supply-demand imbalance has weighed on semiconductor stocks this year.

The Philadelphia semiconductor index, known as SOX, is down about 18% so far in 2022. The index includes 30 semiconductor stocks, such as AMD (AMD), Intel (INTC) and Nvidia (NVDA). Other big names in the index are Qualcomm (QCOM) and Taiwan Semiconductor Manufacturing (TSM).

But the year-to-date decline follows huge gains for the past three years. The chip index rose 41.2% in 2021, 51.1% in 2020 and 60.1% in 2019.

After those heady gains, a fourth year of growth would be “unprecedented,” KeyBanc Capital Markets analyst John Vinh said in a recent note to clients. After a three-year gain of 242%, he recommends investors lean into select semiconductor stocks benefiting from secular growth trends.

‘Key Ideas’ In Semiconductor Stocks

Vinh named five semiconductor stocks as “key ideas” for 2022. They include AMD, Marvell Technology (MRVL), ON Semiconductor (ON), Qualcomm and Synaptics (SYNA).

Piper Sandler analyst Harsh Kumar said 2022 will be a “stock picker’s market” for semiconductor stocks. Specific areas will continue to win while others won’t perform well this year, he said in a  recent note to clients.

“We see cloud, enterprise, 5G infrastructure, electric vehicles, and connectivity as the primary areas of focus,” Kumar said. “We are cautious on the automotive end-market more broadly and PCs.”

His picks among semiconductor stocks include ON Semiconductor and Wolfspeed (WOLF) in electric vehicles. In 5G wireless, cloud computing and enterprise markets, he likes Broadcom (AVGO), Impinj (PI), Marvell and Qualcomm.

Breaking Ground For New Factories

To meet the surging demand for semiconductors, chipmakers like Taiwan Semi, Samsung and Intel are building new factories.

On Jan. 21, Intel announced plans to invest more than $20 billion to build two leading-edge chip factories near Columbus, Ohio. Construction will start later this year with production expected to come online in 2025. Last year, Intel announced major expansions at its factories in Arizona and New Mexico.

The new factories are good news for semiconductor capital equipment vendors such as Applied Materials (AMAT) and Lam Research (LRCX), D.A. Davidson analyst Thomas Diffely said in a recent note.

“We believe the industry megatrends (5G, AI, high-performance computing, electric vehicles, etc.) and massive multiyear, multi-$100 billion investment plans announced by the industry’s largest spenders bode well for strong WFE (wafer fabrication equipment) industry growth and are great news for all the semi-cap names,” Diffely said.

U.S. Looks To Fund Chip Sector

The proliferation of semiconductors in products like household appliances and automobiles has grown the overall market for chips. It has also led to shortages, Deloitte’s Kulik said.

“In the past, the semiconductor industry was focused on creating huge volumes for a limited set of devices — set-top boxes, laptops, phones and servers,” Kulik said. “But with the rest of the world connecting its devices in the home, in the car and in smart cities, there is a more diverse demand for chips.”

Meanwhile, the U.S. government wants to expand the country’s domestic chipmaking capabilities.

On Jan. 25, the U.S. House of Representatives introduced the America Competes Act of 2022. The legislation includes $52 billion to fund the semiconductor research, design, and manufacturing provisions in the Chips for America Act. The Senate passed funding for the Chips Act as part of the U.S. Competition and Innovation Act in June 2021.

The House and Senate now must negotiate compromise legislation that can be sent to President Joe Biden for his signature.

Investor’s Business Daily divides semiconductor stocks into three groups: chip manufacturers, fabless chip companies and chip equipment makers.

The chip manufacturing group currently ranks a fairly strong No. 46 out of 197 industry groups that IBD tracks. The fabless chipmaker group ranks No. 63 and the chip equipment group ranks No. 65.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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