Semiconductors power some of the most important computing products today and are arguably the key to economic growth in the digital age.
These tiny and intricately-designed chips – have skyrocketed in demand during the global pandemic, which naturally led to some big moves in the share prices of the top semi stocks.
The shortage all started with the automotive industry, which faced a sharp decline in demand in early 2020.
With automakers scaling back their production, chipmakers decided to concentrate their efforts on other areas that rely on semis, including consumer electronics and communications.
Now, the automotive industry is essentially at the back of the line as demand has picked back up, while other industries have an even bigger need for semiconductors thanks to trends like the rise of remote work and cloud computing.
The companies that manufacture these powerful chips have been working at full capacity to keep up with the demand, yet since the majority of production comes from just two names, Taiwan Semiconductor Manufacturing Company and Samsung, there’s been a snowball effect that has led to massive shortages.
Combine that with a series of one-off events like winter storms, energy shortages, pandemic-related shutdowns, and the shortage has only gotten more severe.
One of the big problems here is that building new foundries, which are used to manufacture semis, costs billions of dollars and demands a long construction process.
U.S. Department of Commerce Report Paints a Concerning Picture
While some believed that shortages would begin to ease up in 2022, there haven’t been too many positive signs to suggest that is the case.
According to a recent report from the U.S. Department of Commerce, “the semiconductor supply chain remains fragile. Demand continues to far outstrip supply.”
The Department launched a Request for Information on the semiconductor supply chain last fall that received more than 150 responses, including insight from almost all of the major semi-producers.
The findings suggest we still have a long way to go before the shortage subsides, as median demand for chips highlighted by buyers was as much as 17% higher in 2021 than 2019, while buyers aren’t seeing large increases in the supply they receive.
Additionally, the median inventory of semiconductor products highlighted by buyers has fallen from 40 days in 2019 to less than 5 days in 2021.
This tells us that the margin of error is becoming exceedingly slim for chip producers and for the economy as a whole, which is certainly worth monitoring going forward.
What Does the Continued Shortage Mean for Top Semi Stocks?
The aforementioned report suggests that one of the main issues to resolve has to do with wafer production capacity, which could be a big positive for some of the top stocks in the industry.
For example, companies like Lam Research Corporation (LRCX), Applied Materials (AMAT), and ASML Holding (ASML), which are all leaders in chip-making equipment, could be poised for another huge year as clients continue to expand their capacity to meet the exceedingly large demand.
With that said, even dry etch leader Lam Research is not immune to supply chain constraints, as the company’s recent Q2 sales numbers fell short of expectations thanks to component delays.
CEO Tim Archer mentioned “While supply chain conditions worsened in late December and are causing near-term impacts to our results, we expect wafer fabrication investments to again increase in calendar year 2022,”
Shares of semi equipment manufacturers have taken a big hit to start the year, which could present an intriguing buying opportunity given what we know about the situation and how the industry is poised for long-term growth.
Taiwan Semiconductor Manufacturing Company (TSMC) is another major force in the semiconductor industry that could be in for a strong year.
The company is going to continue playing a critical role in dealing with the chip shortages, as TSMC controls roughly half of the market for made-to-order chips.
It’s also worth mentioning that TSMC is planning to invest $100 billion over the next three years to increase its capacity.
This could mean even more dominance is ahead for this pure-play semiconductor foundry.
Other semi stocks like Advanced Micro Devices (AMD) – Get Advanced Micro Devices, Inc. Report NVIDIA (NVDA) – Get NVIDIA Corporation Report, and Micron (MU) – Get Micron Technology, Inc. Report are still in play as well given the continued demand for their products, and the recent market pullback has presented some intriguing entry points.
Advanced Micro Devices just delivered a nice Q4 earnings beat of $0.92 per share, $0.16 better than the S&P Capital IQ consensus, on record quarterly revenue of $4.8 billion.
The company expects revenue of $5.0 billion in Q1 2022, up 45% year-over-year, which tells us that supply chain woes aren’t necessarily impacting the best and brightest companies in the industry.
While there’s no end in sight for the chip shortage crisis, the bottom line is that it’s hard to argue against adding portfolio exposure to at least some of these cutting-edge companies at this time.
