The chip shortage of 2021 is weighing on Wall Street, and a whole variety of companies are paying the price. Today, investors learned of another round of production cuts in everything from large automobiles to small video game consoles. So as you evaluate the semiconductor frenzy, what do you need to know? And which companies stand to lose the most?
Over the last several months, semiconductor makers have been unable to keep up. The reasons behind the supply-demand imbalance are unclear, and have resulted in a lot of finger pointing. For investors, those reasons are almost secondary. They want the car companies they like to keep making cars, and they want consumer electronics companies to keep producing gadgets. Slowdowns are a cause for concern… especially with an unclear end in sight.
If you want to protect your portfolio from the chip shortage, these losing companies are ones to watch carefully. (There is also one big winner you will want to gobble up).
Why Is There a Semiconductor Shortage?
Why is there a semiconductor shortage? Although it is a fair enough question, no two players agree on the answer.
Largely, the novel coronavirus pandemic is responsible. In the earliest weeks and months, semiconductor makers faced factory shutdowns and business restrictions. At the same time, their customers were closing showrooms and factories of their own, representing a major drop in chip demand. Take for instance the automotive industry. With stay-at-home orders and a rise in work-from-home, consumers were simply not driving as much. This meant that standard demand for cars dropped, and Ford (NYSE:F) and General Motors (NYSE:GM) were halting factory production. They did not need as many chips, because they were not making as many cars.
However, auto demand hit a resurgence, as did demand for consumer electronics.
According to Bloomberg, this is where the blame game comes in. Chipmakers blame automakers for keeping their inventories low and not preparing enough in advance. Automakers think chipmakers are favoring their consumer electronics clientele. Some say bored video gamers took supply away from leading automobile firms.
So what happens moving forward? Adding capacity to chip plants can not happen overnight. As Bloomberg also reported, most companies are already running at full capacity. Building a new one would cost billions of dollars. For now then, the question is about how long it will take for the imbalance to right itself, and which companies will suffer most in the meantime.
7 Stocks That Are the Biggest Semiconductor Losers
With that in mind, auto stocks are some of the riskiest in light of the chip shortage.
According to one report, the production of 946,000 vehicles across the industry is at stake just this year thanks to the semiconductor frenzy. General Motors added its production losses to that tally today, announcing it will cut or reduce production next week at four plants in Kansas, Canada, Mexico and South Korea. Although GM has not shared the specifics, the production cuts will impact the Chevrolet Malibu, Cadillac XT4, Chevy Equinox, Chevy Trax, GMC Terrain SUVs and the Buick Encore.
General Motors is joined by Volkswagen (OTCMKTS:VWAGY), Ford, Subaru, Honda (NYSE:HMC) and Toyota (NYSE:TM). Volkswagen, one of the hardest-hit automakers, is now demanding that Europe inject cash into its chipmaking businesses. Analysts also worry that popular Chinese electric vehicle makers will face issues, as the nation imports most of its chips. While some companies like BYD (OTCMKTS:BYDDF) have complete supply chains, it is not clear how Nio (NYSE:NIO), Xpeng (NYSE:XPEV) and Li Auto (NASDAQ:LI) will fare as their own customer demand grows.
Elsewhere in the market, manufacturers of consumer electronics are suffering. Microsoft (NASDAQ:MSFT) continues to warn that Xbox Series S and Xbox Series X shortages will last until June. Sony (NYSE:SNE) has said it is hard for it to increase PlayStation 5 production, and Advanced Micro Devices (NASDAQ:AMD) says console makers in general will struggle to satisfy demand until the fall. Although gamers were snapping up gadgets earlier on in the pandemic, the winter holiday season saw Santa struggle to get consoles under Christmas trees.
Other products at risk? According to semiconductor solutions provider Himax Technologies (NASDAQ:HIMX), laptops, TVs, monitors, mobile phones, tablets and digital cameras could all faces shortages thanks to the chip crunch.
The bottom line: GM, F, VWAGY, HMC, TM, MSFT and SNE all have already reported chip shortage consequences. Others could soon do the same.
Chip Shortage Bottom Line: One Big Winner
While there are no doubt losers from the chip shortage, there are also some big winners. Global semiconductor sales are also rising with demand, and the companies that can deliver will succeed. Looking at where things stand, that is why many analysts recommend Taiwan Semiconductor Manufacturing (NYSE:TSM). The company is the largest dedicated integrated circuit foundry, and analysts expect earnings to grow more than 18% this year. Additionally, Taiwan has asked TSMC to prioritize meeting auto chip demand.
With a boom in electric vehicles and gadget sales underway, TSM stock could be the best way to play the 2021 chip shortage.
No matter what, do your own research and evaluate each of the affected stocks. Whether the shortage ends in a few months or in a decade, it is something that astute investors should have on their radars.
On the date of publication, Sarah Smith did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Sarah Smith is a Web Content Producer with InvestorPlace.com.