A global shortage in semiconductor chips has been wreaking havoc on the tech sector, automotive industry, consumer electronics industry, and everything in between. After years of tepid demand, the COVID-19 pandemic spurred a huge tech buying spree with manufacturers of personal computers, tablets, laptops, and gaming consoles caught off guard.
Indeed, the PC industry has been enjoying a major revival thanks to the work-at-home phenomenon with computer sales in 2020 exceeding 302 million units, good for a 13% Y/Y increase and the most since 2014. At the same time, webcam sales surged almost 360% with video conferencing becoming the new buzzword of modern communication.
The trade war between the United States and China has only served to make a bad situation worse.
In a decision announced last fall, the U.S. Commerce Department declared Chinese chip manufacturer Semiconductor Manufacturing International, or SMIC, persona non grata after determining the company supplies the Chinese military with chips thus making it a threat to national security. The federal government restricted SMIC from obtaining some U.S.-regulated chip-making equipment leading to U.S. buyers cutting back orders from the company. SMIC is one of the largest manufacturers of semiconductor chips, accounting for about 5% of global semiconductor supply.
The fact that only a handful of chip manufacturers actually own chip-making facilities has made the situation even more dire. Currently, only Taiwan Semiconductor Manufacturing (NYSE:TSM), Samsung (OTCPK:SSNLF), Intel (NASDAQ:INTC) own cutting-edge own chip foundries while the likes of Apple (NASDAQ:AAPL), Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD) are fabless and are, therefore, forced to outsource chip manufacturing duties. Further, chip manufacturing is not only highly specialized and complex but also costly business with a typical fabrication factory starting at $10 billion or more. For instance, Samsung has filed to build a new $17 billion factory near Austin, Texas that won’t commence production of chips for almost three years.
Auto manufacturers hard hit
The automotive industry has so far been the hardest hit by the chip shortage, leading several leading automakers to slash production.
Computer chips power everything in cars from antilock braking systems, infotainment screens, and bluetooth connectivity to collision-detection, transmission and the engine itself. In other words, without sufficient supply of chips the auto industry grinds to a halt.
For instance, General Motors (NYSE:GM) has announced that it will close three big factories and cut production at some other facilities through at least mid-March because of a several lack of chips. Ford (NYSE:F), Fiat Chrysler(NYSE:FCAU), Honda, Mazda, Subaru, Nissan and Volkswagen have also been badly hit.
Overall, Axois has estimated that nearly 700,000 fewer vehicles will be produced globally during the current quarter with consulting firm Alix Partners telling Bloomberg that the global auto industry could lose a staggering $61 billion in 2021 as a result of the chip shortages.
PC and console makers have not been faring much better either.
PC manufacturers like HP Inc. (NYSE:HPQ) and Dell (NYSE:DELL) have said they are being negatively impacted by a chip shortfall with tight supply of components like display panels.
The shortage has extended to high-end gaming PCs leading to after-market sellers placing massive premiums on products like GPUs. Meanwhile, Nintendo (OTCPK:NTDOY), which makes the Switch, and Microsoft (NASDAQ:MSFT), which makes the Xbox, have been struggling to meet demand for their consoles with the situation likely to extend through this year's holiday shopping season.
But as they say, every cloud comes with a silver lining.
The global chip shortage has opened up some prime investment opportunities. Here are 3 smart ways to play the global chip shortage.
#1. Buy semi equipment companies
Reuters has reported that president Joe Biden will sign an executive order in the coming weeks authorizing supply chain reviews for critical goods like semiconductors.
White House press secretary Jen Psaki says the Biden administration has been working to identify potential chokepoints in the chip supply chain and is working with key stakeholders and trading partners to ease the shortages.
Meanwhile, a consortium of U.S. chip companies including Intel, Qualcomm, and AMD has requested Biden for "substantial funding for incentives for semiconductor manufacturing" as part of the economic recovery plans.
U.S.-based semi equipment companies Applied Materials (NASDAQ:AMAT), KLA Corporation (NASDAQ:KLAC) and Lam Research (NASDAQ:LRCX) have been flying thanks to expectations of capacity expansions.Taiwan-based TSMC is also expected to benefit thanks to its plans for a new fab in Arizona.
#2. Buy auto chip suppliers
Despite the crippling chip shortages, stocks of leading Detroit automakers including GM and Ford have been shooting the lights out after the companies announced their most comprehensive plans yet to become fully-fledged manufacturers of electric vehicles.
GM has announced plans for 30 new EVs globally under a $27 billion investment in EVs and autonomous vehicles through 2025. That’s a major commitment for a company with trailing 12-month revenues of ~$116B and a market valuation of $80B.
Ford Motors has also started talking big on EVs, recently announcing that it will invest $22 billion in EVs over the same timeframe, double its previous spending commitment of $11 billion.
Meanwhile, Germany’s Daimler AG (OTCPK:DDAIF) has pushed the argument forward by announcing that it intends to split its car and truck making units, with cash flow from the trucking business invested in EVs.
Not surprisingly, GM is up 28.4% YTD; F has gained 31.3% while Daimler stock has gained 70% over the past 52 weeks.
But for investors looking to play the chip shortage, auto chip suppliers Texas Instruments (NASDAQ:TXN), NXP Semiconductors (NASDAQ:NXPI) and Nvidia (NASDAQ:NVDA) are likely to be good mid-term bets with auto chips now commanding big premiums.
#3. Buy SOXX
They say that a rising tide lifts all boats, and the 15.9% YTD gain by the iShares PHLX Semiconductor ETF (SOXX) is proving this maxim true.
SOXX is an exchange traded fund launched by BlackRock, Inc. that tracks companies operating across the information technology (IT), semiconductors and semiconductor equipment sectors. The fund focuses on U.S. stocks, but also invests one-quarter of its assets in international firms, thus giving it relatively balanced exposure.
SOXX is the largest semiconductor ETF with $6.1B in assets under management(AUM). In comparison, second-placed VanEck Vectors Semiconductor ETF (SMH) has $5.1B in AUM.
SOXX’s top 5 holdings as of January 31 2021 were:
- Texas Instruments