2 Semiconductor Stocks to Buy Amid the Automotive Chip Shortage, and 1 to Watch

The empty lots at new car dealerships have attracted the attention of most Americans regardless of whether they pay attention to the semiconductor industry. Thanks to a shortage of semiconductor chips, automobile factories are being temporarily idled, and used car prices have shot higher amid the rising demand for cars.

However, the shortage of such chips has placed the focus on some semiconductor companies that previously received little attention, such as NXP Semiconductors (NASDAQ:NXPI), Texas Instruments (NASDAQ:TXN), and GlobalFoundries (NASDAQ:GFS). Let’s take a closer look at these three companies.

A close-up of a semiconductor designed for automotive applications.

Image source: Getty Images.

Understanding the automotive chip shortage

The semiconductor shortage has affected all tech-related industries. Nonetheless, the nature of the chip shortage differs in the automotive industry.

Consumers who have experienced a decades-long upgrade cycle often pay little heed to less advanced chips. However, a robust market for larger, slower chips remains, and the automobile sector is one of its largest customers. Most automobile functions do not require the fastest chips, and the lower cost makes using slower processors more economical.

Nonetheless, lower-cost products translate into lower profits for chipmakers. Although these chips do not require investments comparable to the $40 billion to $44 billion that Taiwan Semiconductor Manufacturing will invest this year, some companies prefer to invest capital into cutting-edge technologies, though a few have invested in the capacity to produce more automotive semiconductors.

1. NXP Semiconductors is a leader in automotive chips

Given its Netherlands-based headquarters and business-to-business focus, many investors may not know this semiconductor company. Nonetheless, NXP manufactures chips that support driver interaction, safety features, and car electrical systems.

NXP’s automotive segment accounted for $5.5 billion in revenue in 2021, nearly half of the $11.1 billion reported by the company. Moreover, as company revenue grew 28% year over year, the automotive segment experienced a 44% increase during that period. This helped NXP generate $2.3 billion in free cash flow. Despite a massive increase in capex spending, this amounted to a 10% increase year over year.

Also, NXP estimates a compound annual growth rate for the automotive end market of between 9% and 14% over the next three years, faster than the 8% to 12% projected for the entire company. It has accommodated that growth by spending $767 million in capex, nearly doubling 2020 levels.

Admittedly, the 21% revenue increase forecast for Q1 2022 represents some slowing. Also, the 4% drop in NXP stock over the last year may not make investors eager to buy.

Still, a P/E ratio of 27 means its multiple lags the valuations of chip companies such as Nvidia, which sells for 75 times earnings. With the company’s considerable presence in the automotive sector, its stock could move higher as the shortage persists.

2. Texas Instruments quietly profits from chip shortages

With more than 80,000 products across multiple industries, one might struggle to associate Texas Instruments (TI) with the automotive sector. However, automotive is the company’s third-largest market and accounts for 21% of its revenue. TI’s chips power driver assistance systems, electronics, safety, and lighting.

Amid chip shortages, TI has also committed to expanding capacity. It recently bought Micron‘s fab in Utah and announced fab expansions in Texas. In 2021, it allocated almost $2.5 billion to capex, nearly quadruple 2020 levels.

This will help revenue growth, as revenue rose 27% from year-ago levels to $18.3 billion. That revenue led to a free cash flow of $6.3 billion, which helped support $3.9 billion in dividend costs.

Moreover, the payout has become a compelling reason to consider TI stock. At $4.60 per share, the dividend has risen 13% over the last year. It has also benefited from a compound annual growth rate of 25% between 2004 and 2021, amounting to a 52-fold increase in the payout since 2004.

Although TI stock fell 10% from year-ago levels, it has outperformed the S&P 500 over the last five years. At about 20 times earnings, the automotive market could help make Texas Instruments stock a buy now.

3. Keep an eye on GlobalFoundries

Additionally, automotive chip investors should start paying attention to GlobalFoundries. In the fourth quarter, the company signed a supply assurance agreement with BMW and a non-binding collaboration with Ford Motor Company to boost chip supplies.

Admittedly, since automotive chips accounted for just over 4% of its 2021 revenue, Global Foundries likely does not qualify as an automotive chip stock (yet). Still, in 2021, its 36% year-over-year rise in overall revenue included a 187% increase in revenue for its automotive end market. Of the company’s five end markets, the $187 million surge in revenue made automotive second to smart mobile devices as measured by revenue growth.

Also, after years as a private company, it launched its IPO in October, and the stock has risen 17% despite a sell-off in tech stocks. With a price-to-sales (P/S) ratio of just five, it may represent a low-cost opportunity to derive growth from a chip company with an increasing focus on powering automobile systems.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.