The full story on the semiconductor shortage… the original timing of when it was supposed to end… why that timeline just sped up… Luke’s urgent “buy” recommendation
The semiconductor shortage has filled headlines in recent weeks. Here are a few such snippets…
“…the semiconductor shortage rages” … “semiconductor chip crisis continues…” … “semiconductor supply chain issues could last years” …
If you’re like the average investor, you’re aware of this shortage, but haven’t dug into all the details.
Today, let’s fill in those details.
It’s important we do this because semiconductors play a critical role in countless other sectors. In other words, there’s a domino effect – any shortage quickly spills over into adjacent parts of the economy, impacting supply, pricing, profits, and by extension, your portfolio.
So, we want to know how bad this chip shortage will be, and how long it will last.
Fortunately, our technology and hypergrowth expert, Luke Lango, recently addressed these questions for his Hypergrowth Investing subscribers. It turns out, we might already be seeing the light at the end of the tunnel. Given this, Luke is suggesting investors take action right now – and that means buying one specific market sector.
Today, let’s find out what it is. Let’s jump in.
***What’s really behind this semiconductor shortage
For newer Digest readers, Luke is our hypergrowth expert, and the analyst behind Hypergrowth Investing. His specialty is finding market-leading tech innovators that are pioneering explosive trends, leading to huge returns for investors.
Recently, Luke dug into the semiconductor shortage for his subscribers, explaining its origins, and when it might end. This is part of what makes Luke such a great resource for subscribers. Most articles out there do little to explain why the shortage occurred, other than “supply chain weakness.” And nearly none offer detailed forecasts about when it might be over.
So, before getting to Luke’s actionable advice for investors today, let’s review what’s been happening to help set the stage.
From Luke:
It all started back in 2019, when stagnating smartphone and PC sales caused a sudden and steep drop-off in semiconductor demand.
Global semi sales fell more than 12% in 2019, after two consecutive years of 15%-plus growth. In response to this falling demand, many chipmakers – like Micron, SK Hynix, and Samsung – curbed output throughout 2019.
So, heading into 2020, the semiconductor industry was already dealing with a limited supply situation.
You know what happened next…
When Covid-19 hit, the world locked down…which led semiconductor foundries across the world to shut down. This was a massive disruption to the global supply chain.
This was somewhat inconsequential for a few months, because chip demand was relatively weak going into Q2 of 2020 since consumers weren’t buying much given lockdowns.
But as the world is reopening, demand is surging – supply is not.
Back to Luke:
There are two big reasons here.
One, companies have walked a finer line than consumers when it comes to “Covid caution.” Whereas consumers can just decide one day to go and buy a new phone, businesses have had to be more cautious, and have therefore been much slower to “normalize” than consumers.
Thus, while demand for semiconductor chips was surging in the fourth quarter of 2020, chipmaker production capacity was still relatively constrained.
Second, although chipmakers did “wake up” in the first quarter of 2021 and took steps to increase fab capacity utilization, doing so is a multi-month ordeal.
Because of the highly complex nature of producing semiconductor chips, increasing fab capacity utilization is a 26-week process.
That’s half a year…
Throw in the Texas freeze in February that shut down the state’s chip production for a month, and the fire at the Renesas plant in Japan (Renesas is one of the largest chipmakers in the world), and you have a sector with a massive supply/demand imbalance.
***So, when will this shortage end?
Let’s jump straight to Luke:
It’s going to get worse in the second quarter of 2021, before getting better in the second half of 2021 and likely resolving in 2022…
Every major chipmaker out there is taking steps to increase capacity utilization. But those initiatives started in early 2021 – and they take six months – so you won’t see any supply boost from increased utilization until summer, meaning the market will remain supply constrained in 2Q21.
At the same time, consumer demand for cars, phones, and computers will likely accelerate in the second quarter as the economy continues to normalize, meaning that the semiconductor industry’s supply-demand dynamics will become more imbalanced in May and June.
Luke explains that by the third quarter, we’ll see huge supply entering the market. At the same time, consumer demand from the global re-opening will begin tapering off. This will stabilize the market, but we won’t see a full resolve until 2022.
Back to Luke:
There’s a ton of new capacity coming online, which when coupled with increased utilization, will solve the semiconductor shortage crisis.
But it takes anywhere from 12 months to 36 months to get a new fab up-and-running – meaning this new capacity won’t be “live” until 2022, at the earliest.
And that’s why the semiconductor shortage crisis won’t be fully resolved until 2022.
***However, in an encouraging twist, Luke’s latest update to subscribers just sped up this recovery timeline
What a difference a few days makes.
Luke’s analysis of the chip shortage above came last Tuesday. But just three days later, on Friday, he sent out a new update. This one carried a surprising takeaway…
The chip shortage might actually be much closer to ending then previously thought.
Back to Luke:
Yesterday (last Thursday), General Motors – one of the companies that paused auto production because of the chip shortage – raised its financial forecast for the first half of 2021 by a significant amount.
Why?
Because GM is successfully navigating the chip shortage much better than it anticipated.
General Motors even anticipates it will increase production of its heavy-duty pick-up trucks at a plant in Flint, Michigan next month.
Increased production amid a widespread chip shortage? Interesting…
It’s all the more interesting when paired with news from peer auto maker NIO, who just two days earlier reported disappointing May delivery numbers but said that June delivery numbers would soar to record-highs.
Record-high production amid a widespread chip shortage? Interesting…
And that’s not all.
China EV maker XPeng recently reported strong May deliveries of 5,686, up 10% month-over-month. Rival Li Auto reported disappointing May delivery numbers, but said “we are optimistic that our deliveries in the second quarter will exceed the top end of our guidance”. Meanwhile, Ford‘s EV sales rocketed 184% higher in May.
All very interesting…
Do you see the pattern here?
Auto makers across the globe were screaming “fire” a few months back, as the chip shortage was forcing these companies to stop production and miss their delivery targets.
That tune has changed significantly over the past two weeks.
An important note to add – the Renesas factory is already back to 88% production capacity, and should hit 100% in the next few weeks.
When Luke connects the dots, he’s seeing the semiconductor shortage ending much sooner than anticipated. While the overall balance is still out-of-whack, this is very encouraging news indeed.
***Luke is pulling the trigger on buying one particular sector today
For Luke, there’s one key takeaway from this positive semiconductor news…
Buy electric vehicle (EV) stocks.
Earlier this year, many EV stocks took it on the chin in response to the semiconductor shortage. That’s because semiconductors are critical in EVs, so Wall Street feared a semiconductor shortage would depress EV production, curbing sales and profits.
It now appears those fears won’t play out as anticipated, which means it’s time to act.
I’ll give Luke the final word on how he’s playing it:
The world is in the midst of an enormous shift from gas-powered vehicles to electric vehicles. This is a seismic shift of unprecedented proportions – and the companies aligned with it will score patient investors enormous long-term returns.
You want to own EV stocks for the next decade.
Those EV stocks went on sale in early 2021, due to the semiconductor shortage. Now, that semiconductor shortage is easing, and these “on-sale” EV stocks are rebounding.
But your window of opportunity to buy these long-term winners at discount prices is closing.
Take advantage. Now.
Have a good evening,
Jeff Remsburg
