Scarced Silly

A global shortage of semiconductors – a.k.a. microchips – could threaten the earnings of some of the world’s biggest companies and the global economic recovery at large.

 

🕰 Recap

  • Back in October, investors – excited by the prospect of an economic recovery – pushed semiconductor stocks to their highest relative prices in 20 years.
  • That demand for microchips created a crunch, and some would-be customers were left wanting by January.
  • In March, tech giant Intel unveiled a $20 billion plan to ramp up its chip manufacturing.
  • And on Wednesday, Samsung had the chip shortage to thank for its positive earnings outlook.

 

✍️ Connecting The Dots

The semiconductor industry is highly cyclical: a growing economy means more demand for everything from fridges to smartphones, which means more demand for chips – and vice versa when the economy’s shrinking. Semis are so sensitive to economic growth, in fact, that most analysts consider them an “early cyclical” indicator, whose performance can tell you what shape the economy is in far earlier than any official statistics. But to understand what they’re telling us now, it’s worth rewinding six months…

US chipmakers’ stocks hit a 20-year high relative to the overall market in October, probably because investors were expecting a global economic recovery to bode well for their earnings. Since then, they’ve risen further still. But with the semiconductor industry unable to keep up with demand, the supply of microchips has come up short. That’s not entirely surprising: no one was expecting the deepest global recession in 75 years in 2020, so it stands to reason folks would likewise be caught off guard by its rip-roaring comeback this year.

The semis shortage has left the world in a hole. The US government’s doing its part to fix things, but the risk is plain to see: certain companies, industries, and countries will go hungry if there aren’t enough chips to pass around. And if that means they can’t assemble enough products to meet demand, a couple of things might happen: economic activity will slump due to a lack of products being sold, or the prices of available products will shoot so high they bring demand to a halt (not to mention push inflation higher, faster). Either outcome could be catastrophic for global economic growth – and don’t get us started if both were to happen…

 

🥡 Takeaways

1. Potential winners from the shortage: chipmakers and suppliers.

Intel reckons the chip shortage could last a couple of years. Supply and demand being what it is, then, chipmakers would be able to charge more for their products and boost their profits. Those that build chipmaking equipment are bound to have good days ahead too. Take ASML: the equipment-maker’s stock jumped after Intel announced its manufacturing expansion plans, and it’ll no doubt benefit when other chipmakers follow suit.

2. Potential losers from the shortage: carmakers and internet providers.

The time between ordering and receiving a microchip shipment has been rising steadily, hitting 16 weeks last month. Carmakers, for one, are reportedly having to slow down production because there aren’t enough chips to go around – and they can’t (or won’t) pay as much as the likes of Apple to skip the line. But spare a thought for broadband providers: they have a 60-week wait for new WiFi router chips, up from 30 weeks previously. No routers would stop internet providers from adding new customers, risking lost sales and – you guessed it – wider economic growth.

 

🎯 Also On Our Radar

Last week, a host of Amazon workers in Alabama began voting on whether to form a union. And while the result mightn’t matter much, it could set a precedent investors will pay attention to. The risk of higher worker costs is coming home to roost for tech firms, and it’s one investors flagged ahead of Deliveroo’s calamitous initial public offering. The biggest difference when it comes to Amazon, though, is that investors are now likely to accept periodically lower profits from Amazon – which has, to its credit, proved it can actually generate them in the first place.

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