The semiconductor shortage that has wreaked havoc on tens of industries has become a global crisis, adding to issues in global supply chains. Indeed, U.S. commerce secretary Gina Raimondo highlighted the level of impact on American productivity earlier this week.
Addressing the concentration of chip fabrication in the Asia-Pacific region and its negative impact on American industry, she promoted the CHIPS Act to aid in domestic production of semiconductors, noting its passage is "essential for national security."
"The lack of domestic production in America of semiconductors poses not only an economic threat but a national security threat," the secretary said in a press conference on Tuesday. "We need Congress, the House, to pass the CHIPS Act as quickly as possible so that we can get to the business of making more chips in America."
Still, her comments do more to highlight the fact that the shortage is not nearing its close than they do to encourage confidence in a governmental response. Her emphatic remarks appear to belie the fact that the crisis is continuing to extend and stands to severely impact industries that had anticipated relief in the near future.
Semiconductor CEOs are not exactly providing any clarity either as predictions are far apart from executive to executive.
For example, Advanced Micro Devices (AMD) CEO Lisa Su said she expects the latter half of 2022 to be the end of the current bottleneck. Meanwhile, Marvell Technology (MRVL) CEO Matt Murphy has offered a bleeker perspective, forecasting 2024 as a more likely close to current conditions.
Indicating the uncertainty, Micron (MU) CEO Sanjay Mehrotra told CNBC in an interview this summer that he expected the shortage to drag into 2022, but recently revised his forecast in October to 2023 at the earliest.
Overall, this leaves investors with one of their least favorite feelings: uncertainty.
Spending to Stem the Problem?
Inherent in the logic of passing the CHIPS Act and supporting domestic producers is the idea that just spending can solve the shortage. If that is the case, semiconductor companies are not utilizing their wallets correctly towards that end.
Per a recent Gartner Inc. report, overall capital spending on semiconductor production has indeed significantly increased over the past two years. Manufacturers like Intel (INTC) , Taiwan Semiconductor (TSM) , Samsung (SSNLF) , Micron, and more are each pouring hundreds of billions into expansion and innovation. However, nearly all of these billions of dollars have been directed at the newest chips that each firm offers.
This is an issue as those new, cutting-edge chips are not, in fact, the ones that are holding up industries, such as the ailing auto sector.
"The chips necessary for the more mundane uses are simpler, lower profit margin chips, and manufacturers have put less effort in building fabrication plants for these or designing new ones," Eric Leve, Chief Investment Officer at Bailard, told Real Money. "Building new plants will be the critical step to solving this bottleneck, but that should occur over quarters, not months."
He added that the process of reshoring that U.S. manufacturers are seeking is also not an issue with an easy and rapid solution. At the moment Taiwan Semi looks likely to remain an incredibly pivotal factor in the global supply chain and its ability to fill the gap is crucial to dynamics. Given Taiwan's peculiar status at the moment both in terms of geopolitics and Covid-19, this presents problems.
As such, a forecast of the shortage to be stemmed, even by the end 2022, appears increasingly optimistic.
Specific Stocks and Affected Sectors
To be sure,the extended shortage has not been entirely gloomy for investors.
The trade in semiconductors as demand continues to outpace supply has been a fruitful one. For an industry with both cyclical and secular growth aspects, the cyclical side has seen a handsome uptick from the global bottlenecks. As a point of reference, the VanEck Semiconductor ETF (SMH) has risen nearly 200% since March 2020.
Further, demand is only set to increase as paradigm shifts like the emergence of the Internet of Things (IoT) and 5G will require only evermore chips to function. Many of these same trends are set to lift many of the tech names that have buoyed the post-pandemic recovery for years to come as well.
That said, the returns in specific semiconductor stocks targeted at specific sectors as well as those sectors most likely to emerge early from the shortage are likely a great deal more enticing than a broad index or ETF.
For reference, graphics chip innovator Nvidia (NVDA) is far outpacing these benchmarks to the tune of a nearly 500% gain since March 2020. In terms of its focus on both data centers since its acquisition of Mellanox and its leadership in graphics and video-game chips, the chipmaker is clearly capitalizing on current stay-at-home trends and associated demand.
However, the logic of paying attention to the demand drivers do not apply only to semiconductor companies as prices continue to trend upward, but also to those end-users that are set to be adversely impacted.
Perhaps at the largest disadvantage at the moment is the automotive industry. On this front, Mark Granahan, CEO of iDEAL Semiconductor, told Real Money that it is therefore likely to emerge last from the current supply-chain issues.
"The automobile has become a true system wherein it has many, many processors," he explained. "There are a lot of graphics requirements, wireless technologies, and tons of new sensors and analog components. They are touching every aspect of the semiconductor supply chain."
Granahan noted that shortages are likely to only increase as electric vehicles proliferate and increasingly esoteric materials and technologies are required for chips.
While these dynamics are positive for automotive chip suppliers such as ON Semiconductor (ON) and Infineon (IFNNF) , it is likely that automakers like Ford (F) , General Motors (GM) , and Toyota (TM) that are already expressing distress at chip shortages are in for further pain.
By contrast, Granahan indicated his belief that more traditional IT companies like Dell Technologies (DELL) are likely to emerge sooner based upon their comparatively lessened exposure to the full semiconductor supply chain.
On this point, Frank Cavallaro, CEO of semiconductor sourcing firm A2 Global, advised that firm size is also likely to be a major factor.
"Relief from the semiconductor shortage will come for the tech giants first, most likely next year," he told Real Money. "The Apples (AAPL) and the Googles (GOOGL) of the world should see relief first. While semiconductors touch every industry, billions -- trillions are spent every year on consumer goods and industrial platforms powered by semiconductors, and they will be prioritized."
For those companies not worthy of that type of prioritization, 2022 is looking as though it could be quite a trying time.
(AMD, MRVL, NVDA, F, AAPL and GOOGL are holdings in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks? Learn more now.)
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