Tech Companies Are Facing a Global Chip Shortage: 3 Tips for Investors

The semiconductor industry has found itself in a massive supply side shortage situation since the summer of 2020. The industry was already primed for tightness before the COVID-19 pandemic rolled in, due to the long-running trade tension between Beijing and Washington.

When the health crisis arrived, it worsened the situation in two ways. Manufacturers had to deal with the same coronavirus-based operating challenges as everyone else. At the same time, demand for many chip-studded types of electronics surged in the era of working and generally staying at home.

Finally, a terrible drought swept over Taiwan in early 2021, making it difficult for the many chip-building factories on the island to get their hands on large amounts of ultra-clean water.

The chip shortage is holding many industries back, as equipment ranging from smartphones to modern cars to medical devices require lots of freshly built semiconductor chips. Investors across nearly every sector need to keep an eye on the chip shortage because it changes the business landscape in many ways. Here are three important tips that should help you get a handle on the semiconductor shortage and its challenges.

A pile of several broken and burned microchips.

Image source: Getty Images.

1. Yes, this shortage will affect you. And you, and you, and you.

Data-crunching chips are more important than ever in a wide range of devices. The current production challenges place direct limits on the production volumes of cars, phones, drones, toys, medical devices… you name it. And the issue strikes equally across each industry — there are no shortcuts or workarounds available when every competitor in a given sector needs the same chip.

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Here’s how consumer robots specialist iRobot (NASDAQ:IRBT) CEO Colin Angle described the chip shortage effects in last week’s second-quarter earnings call:

Our competition tends to use a greater percentage of Chinese local componentry which has slightly different availability dynamics, but it only takes one component to stop you from building a robot. And even our competitors’ designs require componentry which will be hard to come by. So it’s difficult for us to truly model the extent to which they are going to be impacted, beyond that we know they will be impacted to some degree.

In other words, this is everybody’s problem, even if some rivals have access to a few alternative chip sources. One missing component still cramps the whole unit-building process.

2. This will take a while

In his own second-quarter call two weeks ago, Intel (NASDAQ:INTC) CEO Pat Gelsinger explained how he expects the semiconductor industry’s recovery to play out.

While I expect the shortages to bottom out in the second half, it will take another one to two years before the industry is able to completely catch up with demand. IDM 2.0, which combines our internal manufacturing capacity with the use of third-party foundries, best positions us to weather these challenges and work with our ecosystem partners to build a more resilient supply chain. With major fab construction projects underway in Oregon, Arizona, Ireland and Israel, we are investing for the future. But we are also taking action today to find innovative ways to help mitigate industry constraints.

Intel is not only investing in additional production capacity in order to boost its own chip-building efforts but is also selling some of its manufacturing services to fabless chip designers. Mobile processor veteran Qualcomm is an early win for that strategy, and more will surely follow.

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But these build-outs take time, especially when there is a global pandemic and regional climate challenges to deal with. The semiconductor industry will get back to business as usual, just not anytime soon.

A purple charting arrow bounces skyward off a black trampoline.

Image source: Getty Images.

3. It’s not always bad news

The sectorwide ramping of manufacturing lines obviously leads to strong demand for chip-building equipment and materials. As Applied Materials (NASDAQ:AMAT) CEO Gary Dickerson saw it in his second-quarter earnings call, the shortage actually underscores the global need for more efficient manufacturing systems in the semiconductor industry.

Current capacity shortfalls in some areas of the market show the highly efficient, just-in-time supply chains that have served the semiconductor industry well for the past two decades may not be the most effective strategy going forward. There’s a clear desire for the chip industry to build more resilient and flexible supply, including more regionally distributed capacity as the strategic importance of the semiconductor supply chain is increasingly acknowledged at a national level. It’s also important to recognize that we’re still in the early innings of major secular trends that will play out over the next decade and drive the semiconductor and semi-equipment markets structurally higher.

So Applied Materials expects the high demand for advanced chips to stick around long after the shortages have subsided. Investors agree with his analysis, driving Applied Materials’ stock 121% higher over the last 52 weeks. Companies like iRobot and Intel plot their recovery plans these days, while Applied Materials and other back-end infrastructure experts enjoy fantastic results as we speak.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


View more information: https://www.fool.com/investing/2021/08/03/tech-sector-chip-shortage-3-tips-for-investors/

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