Secular growth in the semi-conductor industry
Secular growth in the semi-conductor industry
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The global semi-conductor shortage, aka chip shortage, has been crippling many industries. Demand for chips is continuing to outstrip supply and the car industry is longer the only one feeling the pain. Many auto-makers are actually limiting the amount of cars produced in 2021, including Ford recently who announced they will be canceling weeks worth of production of the F-150.
Overview
There are a few factors at play giving analysts the impression that this shortage may last until early 2022. There’s a few KEY points that come to mind:
Most chips are produced overseas: Covid-related delays in shipping ports have effected supply coming into the United States.
China has been stock-piling chips: Chinese businesses have bought an absurd amount of chip-producing equipment (roughly $32 billion) in an effort to protect themselves from further US sanctions.
Demand for electronic products have soared.
Often over-looked, consumers don’t realize the amount of chips it takes to build cars in 2021. The trend is continuing in the same direction as many analysts expect the automative industry to begin predominantly developing cars with network connectivity.
This leaves an opportunity for those willing to look past the hardship some of these companies are experiencing of being unable to meet demand. The semi-conductor industry is expected to grow at CAGR of roughly ~9% over the next 7-8 years. I see this as a relatively conservative number and it is my opinion that we are heading into a super-cycle of chip upgrades, processing power, and memory devices. Here are a few reasons:
We are already seeing noticeable shift in demand and the way consumers are interacting in a new digital world.
These electronics are becoming faster and more powerful, which simply requires a larger quantity & quality of chips.
More and more devices rely on connectivity and the car industry is now making it’s way onto a similar path.
Following Nvidia’s earnings call we are seeing a large rise in trends for AI and machine-learning which is leading to increased demand for the required components.
The rise of crypto mining will also play a role in the increased demand.
The Players
Many of the chip-related plays have already seen convincing growth over the last 12 months. However, several names have recently followed the markets to the downside and currently pose a potential good entry point. This secular trend in semi-conductor demand over the next several years is here to stay.
My semis watchlist is holding some familiar names: Applied Materials (AMAT), ASML Holdings (ASML), Skyworks Solutions (SWKS), Nvidia (NVDA), Intel (INTC), Advanced Micro Devices (AMD), Qualcomm (QCOM), and Taiwan Semiconductors (TSM).
The ones that make my shortlist are the following: NVDA, AMD, TSM, and AMAT. Here’s a look at the 2-year chart for the 4 tickers mentioned above.
It is clear the secular trend in computer chips and processors have contributed greatly to the growth of these companies. Let’s take a look at a shorter time-frame. Here’s the 3-month chart for the same list of tickers.
Looking at it from another angle we see AMD and TSM have been lagging behind the performance of AMAT and NVDA, who are on a nearly identical path. TSM is a leading manufacturer of chips and actually supplies most of AMD’s chips. They are based in Taiwan and there have been some concerns over the potential invasion of China. Setting those concerns aside these companies may still experience strong growth. My plays right now are in AMD and TSM and I will feel comfortable adding to any of the names I mentioned in this article if the right entry point shows itself.
Final Thoughts
I would love to say here’s why “x” company is in a better financial position than company “y”, but in this case I believe the high demand for semiconductors will benefit most names participating in this industry. Of course, not every company is made equal so please do your own research before investing in any stocks. In my opinion, this industry is in an upward secular trend and demand remains in-tact, providing tailwinds to the participants.
Keep an eye on earnings reports and financial data of companies that BUY these products. Look at phone, tablet, computer manufacturers (Apple), cloud server providers, Google server expansion (also server chip REPLACEMENT rates, which is a thing), and AI/Machine learning projects (autonomous driving, video analysis, big-data processors). It may be years before the growth slows in this industry and these players will stand to largely benefit.
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