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Qualcomm (QCOM) Chip Shortage Creates Demand-Supply Imbalance

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According to a Reuters article, Qualcomm Incorporated QCOM is reportedly facing a tough time meeting the high demand for chips widely used in smartphones and electronic gadgets. The shortage has created a demand-supply imbalance, and the chip shortfall that first hit the auto industry hard, appears to have transcended to the telecommunication sector.

With Android phone users shunning Huawei models owing to U.S. sanctions, demand for Qualcomm chips has increased manifold. The chip manufacturer is reportedly finding it difficult to cater to this surging demand due to a shortage of certain subcomponents within its chips. This, in turn, is having a ripple effect across various mobile phone manufacturers with some unconfirmed sources revealing that production of mid- and low-end models of Samsung have been affected by it.

The acute shortage is further leading to panic buying by some OEMs, which, in turn, is escalating prices. This has largely affected the smaller manufacturers that lack the firepower to match higher raw material costs and are forced to either halt production or make way with some relatively weaker substitutes.

Notably, certain manufacturing process within the chipmaking division is hard to scale up quickly forcing Qualcomm to adjust its production schedules. Moreover, power shortages due to winter storms might have affected the manufacturing processes of some of its suppliers, thereby affecting the entire supply-chain mechanism.

In order to tide over the crisis, President Biden has signed an executive order to launch a 100-day review process of the supply chain mechanism and devise ways to increase domestic production. He also promised to seek a fund of $37 billion for legislation to ramp up production capacity. It remains to be seen how the federal support is likely to benefit the chipmakers like Qualcomm in the long run.

Markedly, Qualcomm is reportedly the only chipset vendor with 5G system level solutions spanning both sub-6 and millimeter wave bands and one of the largest RF (radio frequency) front end suppliers with design wins across all premium-tier smartphone customers. It is one of the largest manufacturers of wireless chipset based on baseband technology. The company is focusing to retain its leadership in 5G, chipset market and mobile connectivity with several technological achievements and innovative product launches. The company is likely to help users experience seamless transition to superfast 5G networks, delivering low-power resilient multi-gigabit connectivity with unprecedented range and best-in-class security. This is likely to offer the flexibility and scalability needed for broad and fast 5G adoption through accelerated commercialization by OEMs.

The stock has gained 101.6% in the past year compared with the industry’s growth of 87.4%.

We remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry are Aviat Networks, Inc. AVNW and Ubiquiti Inc. UI, sporting a Zacks Rank #1 (Strong Buy), and Clearfield, Inc. CLFD, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Aviat delivered a trailing four-quarter earnings surprise of 61.7%, on average.

Ubiquiti has a long-term earnings growth expectation of 32.9%. It delivered an earnings surprise of 37.1%, on average, in the trailing four quarters.

Clearfield delivered a trailing four-quarter earnings surprise of 62.6%, on average.

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