The global semiconductor chip shortage appears to be getting worse for automakers in the short term, with some experts now saying it could last into 2023 without a major change.
It’s already having a significant impact on the auto industry, as companies have had to shutter plants due to a lack of chips to build their cars, which require more chips than ever as they become more technologically advanced.
This year, car makers could lose $210 billion in sales because of the chip shortage, according to the latest from AlixPartners, or nearly double the losses it estimated in May.
Last Thursday, President Biden met for the second time at the White House with several large automakers, including Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM), as well as some of the tech giants like Apple Inc. (NASDAQ:AAPL) and Microsoft Corporation (NASDAQ:MSFT), to discuss how to handle the shortages.
Interestingly, the government has been asking automakers to report their chip supply and how much they would like or need to purchase, but hasn’t heard much in response. The information could help them better identify the actual extent of the shortages. The president could even force the companies to divulge this information through the Defense Production Act.
The Semiconductor Industry Association said chip factories have ramped up production by 8% since the beginning of 2020 and are on track to produce 16% more chips by the end of 2022.
Federal legislation that’s passed in the Senate but has yet to pass in the House of Representatives could grant $52 billion in subsidies for domestic semiconductor manufacturing.
Automakers like Tesla, Inc. (NASDAQ:TSLA) are taking matters into their own hands and starting to build their own advanced chips or partner with others who can help them.
Tesla moved away from sourcing its most sophisticated chips from NVIDIA Corporation (NASDAQ:NVDA) in 2016 and began creating and designing its own while partnering with Samsung to manufacture the chips. The company has developed a new microchip to train artificial intelligence (AI) networks in its pursuit of attaining fully autonomous driving capabilities and demonstrated it at the company’s “AI Day” last month.
Last Friday, Tesla released updated software that gives select customers access to its Full Self-Driving Beta (FSD Beta) software. The company says the software can automatically change lanes, navigate on the highway, park the car and more without a driver at the wheel.
Volkswagen AG (OTCMKTS:VWAGY) CEO Herber Diess has said the company will design and develop — but not build — its own specialized chips for autonomous vehicles, following Tesla’s lead.
Mercedes-Benz began last year to form a partnership with NVIDIA to develop new chips and software.
Intel Corporation (NASDAQ:INTC) CEO said at the Munich mobility show earlier in the month the company is looking to build new chips and high-tech manufacturing plants that can build designs from other partners. He cited a study that predicts semiconductors will amount to 20% of the cost of materials for cars by 2030, up from 4% in 2019.
Interestingly, the situation bodes well for fundamentally superior semiconductor stocks, one of the hottest new sectors right now.
Unfortunately, Intel simply doesn’t have superior earnings and sales momentum. It also lacks the buying pressure from institutional investors I like to see before I could recommend it. As you can see below, INTC earns a “Sell” rating and Total Grade of D and a Quantitative Grade of D in my Portfolio Grader.
The company has beaten Wall Street’s earnings expectations for the past five quarters in a row.
In July, UMC copresident Chien Shan-Chieh predicted the global semiconductor shortage would last through 2023 as COVID-19 boosted demand for the company’s chips for automobiles and smart home devices.
A couple of weeks later, UMC reported second-quarter earnings of $0.17 per ADS on $1.83 billion in revenue, which represented 89% year-over-year earnings growth and 8% year-over-year revenue growth. The consensus estimate called for earnings of $0.13 per share on $1.78 billion in revenue, so UMC posted a 30.8% earnings surprise and a slight revenue surprise.
Company management commented, “Strong demand fueled by 5G adoption and digital transformation underpinned our strong performance in the second quarter … Looking ahead, we anticipate demand to stay robust in the third quarter driven by megatrends such as 5G and EV.”
UMC shipped 2,440 wafers during the second quarter, which was up from 2,218 wafers in the same quarter last year. For the third quarter, UMC expects wafer shipments to rise between 1% and 2% quarter-over-quarter.
And the company recently took steps to further broaden its reach in the Taiwanese semiconductor industry by forming a strategic partnership with integrated circuit packaging and testing services provider Chipbond Technology Corp. After a share swap with Chipbond, UMC will become the company’s largest shareholder, with a 9.09% stake.
So far this year, UMC’s stock has climbed over 41%. That handily beats the performance of the industry bellwether, iShares Semiconductor ETF (NASDAQ:SOXX), which has risen over 24% year to date, or the S&P 500’s 18% increase.
UMC remains a “Strong Buy” in my Portfolio Grader, with a Total Grade of A and a Quantitative Grade of A.
In fact, my Growth Investor Portfolio is chocked-full of fundamentally superior stocks that are also highly rated in my Portfolio Grader. This includes stocks in several of the most explosive sectors of the economy, like semiconductors, artificial intelligence, and healthcare. So, my Growth Investor Portfolio represents the crème de la crème of growth stocks with strong sales and earnings.
And if you’re interested in my Growth Investor service, now is the perfect time to join. I recently released my Growth Investor October Monthly Issue with three new buys, my latest Top 5 Stocks list, and my outlook for the market going into the seasonally strong time of the year.
P.S. Right now, successful Americans like us have a bullseye on our back.
We’re facing a direct threat to our safety and prosperity.
The values we hold dear, like individual freedom, hard work and fiscal responsibility have been tossed aside.
The U.S. national debt is growing at an unprecedented rate. And more spending is coming.
The cost of essential goods and services seems to get more expensive by the day. Critical materials are on backorder for months. Grocery store shelves are half-empty.
If you have any money in savings, in the stock market, in a 401k or even cash stuffed under the mattress, this should make the hair on your neck stand up.
To help understand the monumental problem we’re facing and why both our way of life and financial security are under attack, I put together a special presentation.
So, if you want to protect yourself and grow your wealth, I encourage you to watch this briefing now.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Microsoft Corporation (MSFT), NVIDIA Corporation (NVDA), Volkswagen AG (VWAGY), United Microelectronics Corporation (UMC)
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