One of the most interesting economic stories many investors seem to be ignoring right now is the chip shortage.

Semiconductors are components in many items we buy in the 21st century. You know how you can now connect your washing machine to the internet and control every electrical appliance in your home with a smart switch? All those conveniences use semiconductors.

That’s in addition to the computers, smart phones, smart TVs, video game consoles, and all the other electronic devices that require semiconductors.

During last year’s economic shutdown, demand for semiconductors for medical equipment rose. When consumer demand snapped back, manufacturers faced shortages of key components. This is forcing some to cut back.

For example, CNBC reported that “General Motors is cutting overtime production this weekend at two U.S. assembly plants that make its highly profitable full-size pickups due to the ongoing semiconductor chip shortage impacting the global automotive industry.”

This shortage will be resolved in time but is likely to last for months, even if Washington throws money at the problem.

Earlier this week, President Joe Biden met with semiconductor industry executives and proposed spending $50 billion to support chip manufacturing and research as part of his $2 trillion infrastructure proposal.

Analysts believe “much of that money will likely go towards the construction of multi-billion-dollar advanced chip plants by Intel, Samsung and TSMC.”

How We Can Profit

Investors are looking for trades that can benefit from that spending, and, according to Barron’s, “Applied Materials (Nasdaq: AMAT) is one such name, and two analysts increased their price targets on the stock…”

Both Credit Suisse and Stifel analysts raised targets and believe the stock is undervalued.

My colleague Jimmy Butts recently weighed in on AMAT as well. He agrees and thinks it’s a good opportunity for traders right now.

A key theme for AMAT is that it’s riding the tailwinds of multiple big catalysts in the tech space that are pushing the boundaries — and creating massive demand — for chipmakers.

First, we have the Internet of Things (IoT) movement. IoT refers to all the connected devices we have in our lives — phones, appliances, computers, TVs, watches, even your thermostat and security system. It’s estimated that by 2025 we will have more than 75 billion connected devices demanding data. That’s double the current estimate of 30 billion devices of today.

The growth of the public cloud market — and now edge computing — continue to grow at massive clips. There’s 5G, there’s autonomous driving, smart cities, the list is nearly endless. All these factors continue to drive semiconductor sales, which after a few stagnant years between 2015 and 2017, is once again growing at a blistering pace.

Despite the recent vote of confidence from a couple analysts, overall, Wall Street seems to be slow to recognize the value in AMAT. Earnings per share (EPS) estimates for this year are $6.03. Next year, analysts expect EPS of $6.65. Those numbers are the average of estimates from 27 analysts.

Last week, the company gave an update for analysts where it provided a bullish outlook for this year and the next few years. Management also announced a plan to buy back a large number of shares. Based on the bullish outlook and lower number of shares, I expect analysts to update their models in the next few weeks and raise EPS estimates.

Action To Take

This makes AMAT undervalued and timely. Investors could simply buy the stock and likely make out well, but I recently told my Income Trader readers about another trade we can make.

This one involves a short-term trade that offers significant income potential. It allows us to get paid instantly, rather than simply sitting on the stock and hoping it will rise.

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