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As Auto Giants Flail, Look To Chip Stocks For Gains

As Auto Giants Flail, Look To Chip Stocks For Gains

Hopes and positive expectations for larger vehicle inventories and lower prices for this summer are now dimming as a prolonged semiconductor chip shortage has caused several major car manufacturers to cut production. 

GM announced it would pause production at eight of its 15 North American assembly plants during the next two weeks due to the chip shortage.

Ford also said it will stop making pickups at its two plants and will be cutting shifts in two more for the next two weeks.

The two U.S. auto giants follow Nissan, Volkswagen, Toyota, Mazda and Subaru in cutting production over chips that are crucial components that make computer-controlled systems in cars work, with electronics accounting for about 40% of a vehicle’s value.

Industry executives now fear that chip shortage could continue into 2022 and even 2023, which means that consumers will continue to pay record-high consumer prices for vehicles, both new and used, in that period.

Kelley Blue Book data shows that while the new vehicle sales in August in the U.S. fell nearly 18% due to chip shortage, the average transaction, at $42,736, was 8% higher than one year ago.

According to new research from IHS Markit, the chip shortage will result in 700,000 fewer vehicles produced globally this quarter. As for the lost revenue due to that, Bloomberg reported it could amount to $61 billion by the end of the year.

With economies reopening and the vaccination process launched back in the spring, car manufacturers (and customers) hoped that a shortage of computer chips that had sent car prices soaring would ease. However, that hasn’t been the case.

Surge in COVID-19 cases from the delta variant in the past few weeks in several Asian countries that are the main producers of auto-grade chips is worsening the supply shortage. 

Earlier this year more than a dozen senators called on the Biden administration to support additional funding to expand chip production in the U.S. Back in February, President Biden said domestic semiconductor manufacturing was a priority for his administration. He also signed an executive order meant to address the global chip shortage. In June, the Senate approved the U.S. Innovation and Competition Act (USICA) aimed to boost US competitiveness with China. The would provide $52 billion to fund semiconductor research, design, and manufacturing initiatives.

For investors, it means it’s time to reconsider those chip stocks, and it’s not too late to get in on this game. Even if we do see an uptick in chip production, it will take a fair amount of time to clear the backlog because this supply chain is way behind.

Earlier this week, Intel announced a $95 billion investment in Europe for new chip-making factories. And this spring, it said it would spend $20 billion to build two separate chip factories at its facility in Chandler, Arizona to challenge Asian dominance. Intel (NASDAQ:INTC) stock spiked in April but YTD its gains have been a more modest 8%. 

Nvidia (NASDAQ:NVDA), on the other hand, has gained nearly 73% so far this year, massively rewarding investors who stuck with this one through COVID. 

Advanced Micro Devices Inc (NASDAQ:AMD) has gained over 18% YTD, and Analog Devices (NASDAQ:ADI) has advanced nearly 12%.

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