Chip makers like Nvidia are set to soar as semiconductor sales to reach $544 billion in 2021, Bank of America says

• Bank of America on Friday raised its 2021 outlook for sales growth in the semiconductor industry to 24% from 21%.
• Semiconductor companies have newfound pricing power in the ongoing global chip shortage.
• Nvidia, ON Semiconductor and KLA-Tencor are among the investment bank's top stock picks in the sector.

Bank of America bumped up its sales outlook for the semiconductor industry as it sees growing demand for chips that make computers and cars run, and named Nvidia and auto chip supplier ON Semiconductor among its top stock picks heading into the final quarter of 2021.

The persistent global chip shortage that has dogged companies ranging from automakers, to video game publishers, to consumer electronics producers, has contributed to strengthening sales for chip companies. BofA expects above-trend growth to last through next year and now projects total industry sales in 2021 to increase by 24% to $544 billion, up from its previous view for an increase of 21%.

"We remain firmly in the stronger-for-longer camp for semis given their critical role in the rapidly digitizing global economy and the newfound pricing power and supply discipline of this remarkably profitable industry operating with a very lean supply chain," said analysts led by Vivek Arya in a Friday research note.

BofA's semiconductor analysts outlined their fourth-quarter playbook before investors headed into the fourth quarter. It said between 2010 and 2020, the fourth and first quarters have been the two best quarters to own semiconductor stocks as the PHLX Semiconductor Sector has outperformed the benchmark S&P 500.

There are three hot spots in the industry: computing, which includes cloud services and AI, gaming and networking; cars; and capex, or capital spending by businesses and the government.

In the computing group, BofA raised its price target on Nvidia to $275 from $260 and said the graphics-cards maker is a top pick along with AMD and Marvell. In the car group, it increased its price target on top pick ON Semiconductor to $60 from $55.

The investment bank called KLA-Tencor its top pick in the capex segment and raised its price target by 6% to $450 from $425. The stock traded around $369 on Friday.