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3 Under-the-Radar Ways to Play the Semiconductor Shortage of 2021

By Billy Duberstein - Feb 14, 2021 at 6:45AM

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These three mid- and small caps should benefit from the massive semiconductor shortage.

Sure, the digitization of the economy was happening anyway entering 2020, but the COVID-19 pandemic has greatly accelerated it. Coming out of the pandemic, consumers and enterprises will now expect more automated, AI-driven, and faster applications. That's causing a big rise in the use of semiconductors, both on the leading edge, for things like 5G and AI, and on the trailing edge, for applications like automotive and industrial sensors.

Yet after two years of trade war and COVID supply cutbacks, the semiconductor industry is in severe shortage. Auto semiconductor shortages have reportedly led to $61 billion in lost sales to automotive companies, according to Bloomberg. Meanwhile, the CEO of diverse chipmaker Microchip (MCHP -3.31%) said on the company's recent conference call that shortages are broad-based, and could last through 2021 and into 2022.

If that's true, the following three under-the-radar semiconductor equipment companies could benefit handsomely, making them well worth our time and attention.

Circuit board assemblies on a tray.

Image source: Getty Images.

ASM International NV

ASM International NV (ASMI.Y -9.27%) may not be on investors' radar, as it's a European stock. It's also not to be confused with lithography leader ASML Holdings. Instead, ASM International is a 53-year old semi equipment manufacturer that primarily makes deposition equipment, specifically atomic layer deposition of extremely thin materials. ASM also has a 25% stake in ASM Pacific Technology, which makes advanced assembly and back-end packaging equipment.

Both segments should perform well as long as chips are in a shortage. Meanwhile, ASM also has a healthy balance sheet of 430 million Euros and no debt. Last year, the company not only raised its dividend per share from 1 Euro to 1.50 Euros, but also paid an additional 1.50 Euro extraordinary dividend, tripling the dividend over 2018. ASM also announced a 100 million Euro share buyback program, which it didn't have in 2018 and it is currently running through now.

With increasing repurchases and dividends, a strong balance sheet, and a business mix poised to benefit from the increasing demand for chips, ASM should definitely be on your radar in the semiconductor equipment space. The company reports fourth-quarter earnings on Feb. 25.

Kulicke and Soffa Industries

Kulicke & Soffa (KLIC -8.88%) specializes in back-end semiconductor and electronics assembly equipment and is currently riding a huge wave of demand. Back-end services are skyrocketing, with Kulicke's revenue up 86% year over year, and even 51% just over the prior quarter. Operating margins expanded a whopping 7.3 percentage points to just over 20%.

CEO Fuson Chen noted that the industry is coming out of a two-year downturn, which has led to under-investment in back-end equipment. In addition, new tech applications like 5G chipsets are leading to more complicated and advanced packaging needs, driving up capital intensity. Because of these factors, Chen believes Kulicke's average through-cycle annual revenue has increased from about $750 million in an average year closer to $1 billion. And the company just increased its fiscal year guidance to $1.1 billion for 2021. Kulicke also just expanded its capabilities with the acquisition of Uniqarta, a small company with next-generation technology in advanced LED displays.

Kulicke & Soffa also has an excellent balance sheet, with about $576 million in net cash, or about 20% of its market capitalization. As a cash generator, K&S has also returned a healthy amount to shareholders, mostly with repurchases, but also a decent 1.3% dividend.

If the trend toward more and more complex advanced packaging persists for multiple years, as many expect it should with things lie 5G kicking into high gear, Kulicke & Soffa still looks like a solid value, even after a huge recent run.

Onto Innovation

Another company that touches the high-octane advanced packaging industry is Onto Innovation (ONTO -10.61%). Onto has two main product lines: advanced packaging, and inspection and metrology systems. Those systems inspect wafers, reticles, and chips for imperfections and are hugely important on leading-edge nodes.

That segment, which made up about a third of revenue, had some impressive customer wins last quarter. Onto's new metrology systems won over an incumbent at a leading NAND customer and also won a key DRAM customer for its leading node ramp-up for 2021.

In the fourth quarter, Onto's revenue grew 23%, and adjusted (non-GAAP) operating income grew 58% over the prior quarter, showing that a V-shaped recovery is happening across all of Onto's products. Management also guided for sequential growth, even after this past quarter's big run.

Onto is well positioned in metrology and advanced packaging -- two product categories that should do exceptionally well as chip complexity increases over time. Combined with an excellent balance sheet, Onto should be a winning stock as the industry attempts to ease the chip shortage this year.

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Stocks Mentioned

Kulicke and Soffa Industries, Inc. Stock Quote
Kulicke and Soffa Industries, Inc.
$39.01 (-8.88%) $-3.80
Rudolph Technologies, Inc. Stock Quote
Rudolph Technologies, Inc.
$62.34 (-10.61%) $-7.40
ASM International NV Stock Quote
ASM International NV
$225.00 (-9.27%) $-23.00
Microchip Technology Incorporated Stock Quote
Microchip Technology Incorporated
$56.16 (-3.31%) $-1.92

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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