Is The Semiconductor Shortage Bullish Or Bearish For Intel And NVIDIA?

There's a semiconductor chip shortage due to a combination of strong demand and supply tightness. Andy Hecht breaks down whether this circumstance is bullish or bearish for Nvidia and Intel.

  • A severe semiconductor shortage

  • INTC and NVDA are leading chip producers

  • A bullish trend in INTC for a dozen years

  • NVDA has been a bullish beast

  • Higher prices lead to higher profits

A semiconductor material has an electrical conductivity value falling between a conductor, like metallic copper, and an insulator, like glass or silicon. A semiconductor’s resistivity falls as its temperature rises, which is the opposite of metals. Semiconductors are essential components of electronic devices in communications, computing, healthcare, military systems, transportations, clean energy, and many other applications.

Samsung Electronics is the leading semiconductor manufacture worldwide. Intel Corporation (INTC) and Nvidia (NVDA) are two US companies in the top ten.

In 2021, the strong demand for electronics is creating a shortage of semiconductor chips.

On February 11, a group of US chip designers and manufacturers sent a letter to the US White House, asking the government to include “substantial funding for incentives for semiconductor manufacturing” as part of the coronavirus recovery plan. The Biden administration pledged to remedy the situation and followed through with an executive order directing a government-wide review of supply chains for critical goods. The bottom line is that there is a chip shortage as INTC and NVDA shares are moving appreciably higher.

A severe semiconductor shortage

Cars, electronics, gaming consoles, mobile phones, and many other products depend on the chips or semiconductors that make them work.

After a few years of weak demand for technology products, the global pandemic caused a substantial-tech buying spree. Purchases of personal computers, laptops, tablets, and many other products cleaned out supplies. Computer sales were 13% higher in 2020 than in 2019. Webcam sales more than tripled as people working from home needed equipment for video conferencing.

Meanwhile, the US trade war with China since 2018 caused many companies to avoid buying ships from SMIC, a Chinese manufacturer that supplies around 5% of global semiconductors and 10% of the chips made with older technology.

There is no quick answer to deal with the shortage of semiconductors. Building a new factory takes time and is a complex process. President Biden’s executive order calls for a “review of supply chains,” but it lacks teeth and the details that will put more chips into the manufacturer’s hands. Meanwhile, supply and demand tell us that semiconductor prices are climbing, which is good news for some of the leading chipmakers.

INTC and NVDA are leading chip producers 

Intel Corporation (INTC) is the world’s second-leading chip maker. Intel provides the central processing units, chipsets, system-on-chip, and multichip packages, along with many other semiconductors that allow technology to work and operate. INTC has been around since 1968, with its headquarters in Silicon Valley,

NVIDIA Corporation (NVDA) is a specialized semiconductor manufacturer that operates in two segments. The GPU segment makes the chips for PC gaming and mainstream computers, cloud-based gaming, video editing, special effects, artificial intelligence, and other advanced applications. The Tegra Processor segment makes the chips that make mobile cloud applications and home entertainment work. NVIDIA sells its productions to a wide range of companies worldwide. NVDA has been around since 1993, with its headquarters in the same city as INTC. INTC and NVDA are the two top key US suppliers of semiconductors.

A bullish trend in INTC for a dozen years

As of the end of last week, INTC’s market cap stood at $256.01 billion, with the shares at $63.01. Intel trades an average of over 39 million shares each day. The company pays shareholders a $1.39 dividend, translating to 2.2%.

Source: Barchart

Unlike many other technology companies, INTC reached its all-time high back in 2000 at $75.81 per share. The stock fell to a low of $12.05 in 2008. Since then, INTC has made higher lows and higher highs but has yet to challenge the 2000 peak. After reaching a low of $43.61 in 2020, the stock was back over the $63 level at the end of last week.

Source: Yahoo Finance

INTC has been consistently profitable over the past four quarters, beating analysts’ EPS expectations in three and meeting them in one. In Q4, INTC beat by 42 cents per share.

Source: Yahoo Finance

Revenues and earnings have been on a positive path from 2017 through 2020. A survey of thirty-three analysts on Yahoo Finance has a price target of $62.05 for INTC, with estimates ranging from $40 to $86 per share.

NVDA has been a bullish beast

While INTC remains below its record high from over two decades ago, NVDA has been a bullish beast. NVDA has a $369.58 billion market cap with an average of over 7.1 million shares changing hands each day.  NVDA’s dividend is only 64.0 cents or 0.11% at a share price of $597.06 on February 19.

Source: Barchart

The long-term chart shows that when INTC shares hit their peak in 2000, NVDA traded to a high of $14.67. As of last Friday, the stock was just below $600 after trading to a high of $614.90 on February 16. NVDA shares made new and higher highs since May 2020.

Source: Yahoo Finance

NVDA’s earnings record over the past four quarters has been impressive as the company consistently beat EPS estimates.

Source: Yahoo Finance

As the chart shows, revenues and earnings at NVDA have supported the substantial rally in its shares, which have more than tripled from the March 2020 $180.68 low to the $600 level. A survey of thirty-six analysts on Yahoo Finance has a $599.37 target for NVIDIA shares, with projections ranging from $347.54 to $700.

Higher prices lead to higher profits

INTC and NVDA are semiconductor companies at the top of the heap in the United States and globally. A shortage in the semiconductor market will only increase the price of the chips that make technology work. Meanwhile, INTC and NVDA will work overtime to crank out as many chips as possible to meet the rising demand and take advantage of the current shortage. Earnings should soar and share prices should continue on the bullish path.

NVDA’s specialty chips have rewarded the company with extraordinary share growth. I expect INTC shares will move to new highs as the chip shortage will highlight the company’s importance to the technology sector.

I view the shortage as bullish for the semiconductor makers. However, increased production will eventually meet the demand and create another glut of chips in the coming years. Chips are commodities and have the same price dynamics as other raw materials. I look at companies like INTC and NVDA as commodity producers. They should do well and outperform chip prices while the shortage exists. When the deficit turns to a glut, they are likely to underperform the market when semiconductor prices decline.

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NVDA shares were trading at $551.46 per share on Tuesday morning, down $22.77 (-3.97%). Year-to-date, NVDA has gained 5.60%, versus a 2.70% rise in the benchmark S&P 500 index during the same period.

About the Author: Andrew Hecht

Andy spent nearly 35 years on Wall Street and is a sought-after commodity and futures trader, an options expert and analyst. In addition to working with StockNews, he is a top ranked author on Seeking Alpha. Learn more about Andy’s background, along with links to his most recent articles.


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