What the Semiconductor Shortage Means for Tech Investors
JThe global shortage of semiconductor chips is getting worse and it might not go away before the end of 2022.
In this video from “The Virtual Opportunities Show”, recorded on January 25Fool analyst Asit Sharma and Fool contributors Rachel Warren, Demitri Kalogeropoulos and Jose Najarro discuss the latest US government report that shows how little cushion remains in this vital part of the global supply chain, and reflect the impact it might have over the next year.
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Demitri Kalogeropoulos: The article I saw today in The Wall Street Journal — the headline talks about semiconductor chips, and it says: “Chip Shortage Leaves US Companies at Dangerously Low Levels of Semiconductors.” We’ve been talking about it for a while. It is not a surprise. But now we have hard numbers and updated figures. We know there’s been an increase in demand, obviously, for anything related to technology. Also, at the same time, we had a supply issue with the pandemic and things like that. So that created this historic shortage of chips. But, we got updated figures from the government. The Department of Commerce does a survey from time to time in different manufacturing worlds, and this one was in the semiconductor space, asking US companies to estimate what their inventory is in these important and critical things. The companies came back and they said five days. Basically, the result of this survey was that most US companies have around five days of inventory of these chips, which – if that sounds low, it really is a very low number. It’s basically no stocks of these things in inventory.
The article described [that] in a normal year – in 2019, let’s say – companies would have something like 40 days of this inventory in stock, so very little. The article quotes Commerce Secretary Gina Raimondo (hope I’m saying this correctly) saying the semiconductor supply chain is “very fragile” right now.
You may have heard that there is a big political movement to get spending in this area, to bring more semiconductor manufacturing to the United States from Asia, China and Taiwan. Just this week Intel made a big, splashy release, talking about the $20 billion they plan to spend on adding new factories, I think it’s in a few cities in Ohio, just to get that manufacturing there. But we know that this kind of thing, it’s going to take years to increase domestic production. So it’s interesting.
I just think now that we’re heading into the heat of earnings season, I’m sure we’re going to hear from a lot of companies… It might surprise you in terms of the impact all of this can have across different industries. We know the automotive industry is the most obvious, but there’s everything – all kinds of consumer technology. So I think we’re going to hear a lot of companies describing shortages.
The other thing is that it’s an interesting risk to consider in the tech world, because according to this, if a factory closes in Taiwan for a week or two, it could have huge ramifications. We’ll be operating with this ultra-thin inventory probably at least until the second half of the year. Just interesting to keep an eye on.
Rachel Warren: When I heard the whole “five day chip shop” I was like, “Wait, five days, right? This can’t be real.” And, is it a combination of not being able to restock that minimum store that they would always keep on hand, in addition to perhaps having to dip into that store to meet the ongoing demands that exist? I feel like it’s something that’s going to stick with us for a while.
We know that companies are able to handle this in different ways. Some have more control over their supply chain than others. Some companies have made major acquisitions and partnerships to try to bridge the gap in their supply chain, so to speak.
Yeah, I think that’s something to be aware of, and we know we’ve seen a lot of volatility in stocks operating in this space. It is not just a singular factor that is the solution to ending these problems. I think that’s something we’ll be dealing with, at least for several months. This example of “one place closes and the whole world is hit” — I remember, several months ago, there was a key port, I believe, in China, which handles something like 70% of world trade, and it closed down due to a case of COVID. This therefore abruptly stopped all these different elements. I think when you think about how interconnected we are in this global economy, it definitely breaks it down and makes it easier to understand why it’s happening. But I’m curious to see what some of these companies, based on their revenue, how they’re going to solve that, because it’s like the elephant in the room. [laughs] It’s not going anywhere. Yeah, just my first thoughts.
Jose Najarro: There was one company – ASML Holdings – which reported earnings last week. For those unfamiliar with ASML, this is a company that creates equipment used in the semiconductor manufacturing process. One thing they mentioned in their earnings call might be a little scary. They said that normally, since they create equipment to make sure that QA and everything goes well, after the equipment is created, they spend another four to eight weeks testing the equipment, in making sure it works properly before sending it to their customers. Their customers are manufacturers like TSM, like Intel, Samsung, some of the bigger manufacturers. And they say, “Hey, right now we’re willing to take the risk of not doing this QA testing because we want this gear four to six weeks early.” Obviously they probably still have some little testing they do in the back-end, but it’s no longer at the depth that they usually do. It’s scary how in demand the semiconductor industry is right now. It’s also scary: if one of these pieces of equipment ends up failing, that itself can cause other faults down the line.
Asit Sharma: By the way, Rachel, José gave the signal when you started talking because he had his microphone on before you.
Warren: I am really sorry.
Sharma: I hope I followed his protocol. But what has come to mind is the vulnerability of some consumer-facing businesses over the coming year if these shortages persist, which they will. We’ve seen this hit Best Buy’s revenue before. Really fun company to follow: well managed, high return on capital. They understood the retail game, as difficult as it is. But I see maybe other rough waters for them. They, in particular, and companies like them, could be vulnerable to these chip shortages, because these chips aren’t just for automobiles and large, heavy-duty electronics. They are also getting into small consumer goods. It’s something to watch out for. I’ll be a Best Buy buyer at some point this year – I think Demitri might still hold some stock, if I’m not mistaken. Do you still have your shares, Demitri?
Kalogeropoulos: I have never bought Best Buy. I talk about them a lot there – I’m impressed with their company, that’s for sure.
Sharma: For some reason I thought you were a shareholder at one point, but yeah, that’s something I’d be looking for this year if they were hit by the token shortage, maybe to get in and grab some shares. The other thing – something Rachel said triggered a memory of an article I read this morning that the World Bank is revising slightly down its growth estimates for the world next year, including the United States and China.
The United States in part, that’s one of the factors — the shortage of chips that affects us as it does the rest of the world. China, in particular, due to its zero tolerance policy for COVID. That port you talked about that was shut down with a case of COVID – it’s hurting their economic growth.
Asit Sharma has no position in the stocks mentioned. Demitri Kalogeropoulos has no position in the stocks mentioned. Jose Najarro has no position in the stocks mentioned. Rachel Warren has no position in the stocks mentioned. The Motley Fool owns and recommends ASML Holding, Intel and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: $57.50 long calls on Intel in January 2023 and $57.50 short puts on Intel in January 2023. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.