What comes next for semiconductor companies? - The Average Joe

    What comes next for semiconductor companies?

    Victor Lei — Head of Research

    November 23, 2021

    semiconductors

    November 23, 2021

    Waiting an eternity for your new Apple products? You can blame the major chip shortage — a key part of electronics and car manufacturing. While it was a tough year for companies like Apple to source chips, it was an extraordinary year for chip sellers…

    Record year, record profits

    Since the start of COVID, supply chain issues and high electronics demand led to a major chip shortage — sending semiconductor stocks soaring. Analysts expected shortages to ease by now — but now forecast it lasting into 2022 and even 2023.

    Despite lost sales for chipmakers, price increases drove up profitability. The sector also received a boost from recent announcements:

    • Facebook’s Meta rebrand shifted attention to companies building the computer chips powering this virtual world.
    • General Motors and Ford partnered with several chip manufacturers to develop their own chips.
    • Strong earnings showed investors two things: Chipmakers were more profitable and demand stayed strong.

    According to analysts, earnings of semiconductor-related companies grew 56% last quarter — higher than the 40% growth forecasted among all S&P 500 companies.

    What happens when supply catches up?

    The iShares Semiconductor ETF (NYSE:SOXX) is up 40% this year but some analysts see this as a one-off demand surge — with companies over-ordering to meet demand — worsening the shortage.

    • Supply is bound to catch up — chipmakers are spending billions ramping up production and the supply chain will eventually ease.
    • If buyers overstock inventory, chipmakers could see a sudden drop in demand — negatively impacting future earnings.

    As demand slows, JPMorgan recommends pursuing longer-term industry trends — i.e. high-end chipmakers specializing in advanced computing — that can withstand a shift in demand.

    • At the top of the list of advanced chip makers: Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD).
    • Both companies’ chips power Amazon, Microsoft and Google’s data computing businesses.
    • Both stand to benefit from Meta’s plan to invest $10B into AR and VR hardware.

    Investors: Help is stuck in the White House

    In June, the US Senate passed the Semiconductor Act — an emergency funding bill of $52B to build more chip manufacturing capacity — only to remain stuck in the House since.

    Early November, US officials pressured Congress to move the bill forward — which could benefit US chip manufacturers like recently IPO’d GlobalFoundries (NASDAQ:GFS).

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