The U.S. passed the much anticipated CHIPS for America Act in an attempt to bring semiconductor manufacturing back to America. The recently enacted law earmarks US$280 billion to support domestic semiconductor manufacturing and scientific research.
Semiconductor chips power a range of devices and systems including smartphones, cars, computers, medical equipment and defense systems. The government funding could provide a substantial boost to U.S. chipmakers by enhancing their global competitiveness.
In an industry long struggling with shortages and supply disruptions there are some lesser-known players that could win big as the beneficiaries of the chip bill. Now may be a good time to look at the following names that are well positioned to gain as the U.S. pares back its chip dependence on China.
U.S. chipmaker KLA Corp (KLAC) designs and manufactures yield-management and process-monitoring diagnostic and control systems for the semiconductor manufacturing industry.
The systems are used to analyze the manufacturing process at various steps in a semiconductor's development. “KLA dominates the process diagnostic and control segment of the semiconductor equipment industry,” says a Morningstar equity report. “During the fabrication process, wafers must be inspected for defects and proper critical dimensions to identify and rectify problem sources.”
Process diagnostic and control (PDC) tools help customers improve semiconductor die yields, accelerate development and product ramps, and ultimately maximize profitability.
A comprehensive portfolio of PDC tools and leading technical expertise that enable its products to be in every major chip-manufacturing facility in the world underpin KLA’s wide economic moat. This competitive advantage positions it well for healthy growth going forward, says Morningstar sector strategist Abhinav Davuluri, who puts the stock’s fair value at US$410.
The firm boasts a 50%-plus share in the PDC market and has built its leading technical expertise and extensive knowledge base into its competitive strength.
Analog and mixed-signal chipmaker Monolithic Power Systems (MPWR) specializes in power management solutions. The firm’s mission is to reduce total energy consumption in end systems, and it serves the computing, automotive, industrial, communications, and consumer end markets.
“Monolithic Power Systems is a disruptor in the power management chip market, using its proprietary process technology to differentiate from larger competitors,” says a Morningstar equity report.
Electrical engineers tend to buy power management semiconductors from reputable, proven vendors that use lagging-edge manufacturing. As a relative newcomer, MPS differentiates via its unique fabless model, with which it develops advanced manufacturing processes that integrate many functions on a single chip to offer a smaller form factor and greater energy efficiency to its customers.
“While MPS remains a small player in power management with about a 2% market share, we think revenue growth far above its largest competitors over the last four years shows its differentiated approach to power management is gaining traction in the market,” says Morningstar equity analyst William Kerwin, who recently raised the stock’s fair value to US$562 from $540, incorporating blockbuster second-quarter sales.
He expects MPS to focus on organic top-line growth across all its end markets going forward and to “continue outgrowing other analog chipmakers as it takes market share.”
Qorvo (QRVO) specializes in radio frequency filters, power amplifiers, and front-end modules used in many of the world’s most advanced smartphones. The firm also has a suite of products sold into a variety of nonsmartphone end markets including wireless base stations, cable TV and networking equipment, and infrastructure and military applications.
As a leader in radio frequency chips sold to smartphone makers, Qorvo earns more than 70% of its revenue from mobile products.
“Given the rise of advanced 4G and 5G-enabled smartphones, which use a wider variety of wireless spectrum and frequency bands than in prior generations of networks, RF content per phone has grown exponentially in recent years, lifting both Qorvo and its RF competitors,” says a Morningstar equity report.
Since 5G networks are more complex than 4G, Qorvo's expertise is even more valuable to device makers. “These trends should make for a nice runway for further RF growth for Qorvo,” argues Morningstar sector director Brian Colello, who puts the stock’s fair value at US$157, which implies a fiscal 2023 price/adjusted earnings multiple of 20 times and a 5% free cash flow yield.
Qorvo is one of the few RF firms with the scale to supply hundreds of millions of RF products each year, giving the firm an edge over new entrants.
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