This is both the best of times and the messiest of times for the chip industry.
On one hand, demand is pretty good right now for most chip developers, not to mention the foundries, test/assembly firms, IP providers and equipment makers they directly or indirectly rely on. Though there have been some exceptions to the rule, we've mostly seen a non-stop barrage of strong earnings reports and guidance hikes from major industry players since October.
Notebooks, tablets, gaming hardware, and a lot of other consumer tech and electronics products used within homes are still flying off the shelves. Also, auto and (outside of China) smartphone demand has rebounded strongly after slumping this spring.
While cloud capex is in a digestion period right now following huge first-half growth, on-premise enterprise hardware is perhaps the only major chip end-market that's truly having a rough time.
In addition, commentary from companies such as Broadcom (AVGO) , AMD (AMD) , Qualcomm (QCOM) and Micron (MU) suggests the good times are set to continue in the first half of 2021 (if not longer), as do various supply chain reports. Among other things, chip suppliers have forecast 2021 will be another strong year for cloud capex and another growth year for the PC industry, and that smartphone sales will see meaningful growth as the industry makes up from the slump it saw earlier this year.
Aside from healthy end-market demand, strong order visibility -- amid a backdrop of stretched lead times for fulfilling orders -- is giving chip developers and other industry firms confidence that first-half sales will be strong. On Broadcom's Thursday earnings call, CEO Hock Tan said that he sees strong demand from cloud and telco clients continuing "as far as you can see" in 2021, and that (with Broadcom's lead times now above 6 months, and its orders non-cancellable) his firm's 2021 visibility looks "remarkably better than we usually have at this point" in the year.
That's the good news. The bad news is that lead times are stretched in part because of various supply chain bottlenecks -- caused by a mixture of strong demand and COVID-related supply chain disruptions -- that are preventing companies from fully meeting customer demand.
One only has to look at how -- with gaming activity through the roof, and supplies very tight for the chip manufacturing processes used to make the silicon powering these products -- the latest game consoles and high-end graphics cards remain out of stock at retailers. Or at how firms such as HP (HPQ) and Dell (DELL) are cautioning that chip and display panel shortages will constrain their notebook sales into early 2021.
The auto industry hasn't been unscathed either. NXP Semiconductors (NXPI) (the world's biggest auto chip supplier) told customers in late November that it's raising prices across the board as it deals with both chip shortages and a "significant increase" in materials costs. And Volkswagen and other automakers have been warning that chip shortages stand to impact their production.
On the whole, this is a better state of affairs for the chip industry than one in which end-market demand is very weak. But it does raise problems for chip suppliers that go beyond simply not selling as many chips as their customers are willing to buy right now.
On more than a few occasions in the chip industry's history, major chip-buyers have responded to an environment featuring tight chip supplies and expanding order lead times by ordering more than what they really need, in order to play it safe. As a result, when end-market demand weakens and lead times ease, you often end up with an inventory correction as customers work through the supplies they previously stockpiled.
We're probably not going to see anything like that in the early part of 2021, given both how end-market demand is currently trending and what chip developers have been forecasting. But there is some risk that conditions could start changing in the spring or summer of 2021, particularly if the large-scale distribution of COVID vaccines begins leading consumer spending to shift away from goods purchases and towards things such as vacations and restaurant trips.
For now, however, industry conditions still look pretty healthy, if more chaotic than usual. And with chip stocks (like so many other tech stocks) generally up big on the year, it's definitely good for investors that they look this way.
