A massive global shortage of the semiconductor chips that go in everything from automobiles and industrial equipment to smartphones, computers and household appliances is showing no sign of letting up.
The industry now has about a five days’ supply of chip inventory, which is significantly down from the 40 days’ supply it had in 2019. That makes companies relying on semiconductors to build their products particularly vulnerable to an overseas semiconductor plant shutdown lasting a couple of weeks. Businesses may have to close temporarily and furlough workers in such a scenario.
The Susquehanna Financial Group LLP says businesses are now waiting more than 25 weeks for new chips, while the normal wait time has been around 10 to 14 weeks.
According to a recent Department of Commerce report, the chips most impacted by the shortage are the legacy logic chips used in medical devices, automobiles and more, the analog chips used in power management, image sensors, radio frequency and other applications, and the optoelectronics chips used in sensors and switches.
Starting in the second quarter of 2020 through 2021, semiconductor makers have been operating at over 90% utilization, which is very high for a business that relies on regular maintenance and large amounts of energy input.
Of course, chip demand has been on a tear in recent years and grown more intense during the pandemic, with demand rising 17% in 2021 compared to 2019.
Annual sales for the industry surpassed $500 million for the first time last year, beating the total for the global smartphone market, and show no sign of cooling off.
Tom Caulfield, CEO of GlobalFoundries Inc. (NASDAQ:GFS), told The Wall Street Journal: “It took 50 years to become a half-a-trillion-dollar industry. It’ll take just eight to 10 years to reach a trillion dollars.”
Global chip sales increased 25% in 2021 from the year prior to a record $583.5 billion. Gartner Inc. predicts that along with increasing prices, sales will rise again this year by 9%, blowing well past the industry’s average annual growth pace.
Industry analysts expect the more expensive, top-of-the-line chips that go into artificial intelligence (AI) applications like machine learning, as well as high performance computing, will likely lead the sales growth.
Gartner predicts the industry is on track to bring in $692.5 billion in sales by 2025 and a whopping $1 trillion by 2030.
The industry has moved swiftly to ramp up capacity, with companies investing at least $146 billion in 2021, which was more than double the outlay for the prior five years.
Even the White House has been advocating for Congress to go ahead and pass the CHIPS Act — the legislation has been approved by the Senate and has stalled in the House of Representatives — that would allocate $52 billion for domestic semiconductor manufacturing.
So while it will remain frustrating for consumers looking to purchase the latest tech gadgets that use an ever-expanding set of semiconductors, the situation bodes well for the high-quality companies that are expected to benefit from the supply chain shortage.
Choosing the Crème de la Crème of Semiconductors
In fact, the microchips made from semiconductors are the lifeblood of the modern digital world. Everything from tech, manufacturing, and agriculture to travel, entertainment, and banking can’t function without massive amounts of computer chips.
And with new technologies like 5G, the Internet of Things (IoT) and AI all converging and growing every single day, demand for chips will remain strong for years.
I think we’re in the early stages of a massive chip manufacturing boom, and so, in the short term, I expect chip manufacturers to generate incredible earnings throughout 2022.
But I also expect the market to focus more on semiconductor companies with superior fundamentals as we get deeper into the fourth-quarter earnings season and year-over-year comparisons grow more difficult.
Intel Corporation (NASDAQ:INTC) has said it will build a new chip factory in Ohio that may expand into eight facilities that could cost up to $100 billion. The company already has other expansions on track in Arizona, New Mexico and Europe.
On January 26, the company reported fourth-quarter earnings of $1.13 per share, down from $1.42 per share a year prior and topping analysts’ estimates for $0.79 per share by 43%. Revenue of $19.5 billion was down from $20 billion a year ago and bested estimates by $1.2 billion. INTC shares fell 7% on the heels of its earnings report.
But check out how it ranks in my Portfolio Grader.
As you can see, the company earns a Total Grade of “D,” which makes it a “Sell” right now.
Taiwan Semiconductor Manufacturing Co., Ltd. (NYSE:TSM) is the leading chip maker in the world and has plans to outlay $44 billion on capital investments just in 2022, with expansions on tap in Arizona, Japan, China and Taiwan.
On January 13, the company announced that it brought in fourth-quarter earnings of $1.15 per share, up 19% from a year earlier and beating estimates by about 3%. Revenue of $15.9 billion was up 23% from a year ago and beat estimates by half a percentage point. The stock slipped post-earnings and now trades well below its pre-earnings share price.
Here’s how it ranks in my Portfolio Grader.
The company is currently a “Hold” and not boasting the superior fundamentals I need before I recommend it.
Then there’s NVIDIA Corporation (NASDAQ:NVDA).
Let’s see how the gaming semiconductor leader stacks up in my Portfolio Grader.
As you can see, the company earns a Total Grade of “B,” a Quantitative Grade of “A,” which represents institutional buying pressure under the stock, and a Fundamental Grade of “B.”
Its high Fundamental Grade is no surprise given the company’s earnings results in its third quarter in fiscal year 2022. Thanks to double-digit data center and gaming revenue growth, NVIDIA achieved record results. Revenue jumped 50% year-over-year to $7.1 billion, topping analysts’ estimates for $6.83 billion. Data center revenue increased 55% year-over-year to $2.94 billion, while gaming revenue rose 42% year-over-year to $3.22 billion. Both were new records for the company.
Third-quarter earnings soared 60% year-over-year to $1.17 per share, compared to $0.73 per share in the third quarter of fiscal year 2021. Analysts were expecting earnings of $1.11 per share, so NVIDIA posted a 5.4% earnings surprise.
Company management commented, “The third quarter was outstanding, with record revenue. Demand for NVIDIA AI is surging, driven by hyperscale and cloud scale-out, and broadening adoption by more than 25,000 companies.”
NVIDIA is scheduled to report its latest quarterly results on February 16, and analysts still see solid growth ahead. The analyst community is expecting fourth-quarter earnings of $1.22 per share, up 58% from a year ago. Wall Street anticipates revenue will surge 48% year-over-year to $7.4 billion.
The company’s stock has soared over 88% in the past year, compared to the S&P 500’s 23% gain. I recommended the stock to my Growth Investor subscribers back in May 2019, so they’ve gotten to take advantage of much more of the stock’s upside since then.
But it’s far from the only fundamentally superior semiconductor stock sitting on my Growth Investor Buy List right now. (Join Growth Investor now to view all the names.)
And as I just mentioned, it’s more important to be invested in fundamentally superior stocks, like NVDA, as these should be the companies investors turn to as Wall Street grows more fundamentally focused.
I should add that in the past three months, the analyst community has revised their consensus earnings estimate up 12.1% higher for my Growth Investor stocks. This is a very good sign, since positive earnings revisions typically precede future earnings surprises.
For more information on my Growth Investor stocks and what I expect from the stock market in the coming weeks, I encourage you to sign up for my Growth Investor service today. Once you do, you’ll have full access to my latest recommendations — including the most recent additions to my Growth Investor Buy Lists. One should be a big benefactor in the accelerating electric vehicle (EV) industry and two divided growth stocks earn an AA-rating (an A-rating in Portfolio Grader, an A-rating in Dividend Grader and an A-rating for their Quantitative Grade).
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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:
NVIDIA Corporation (NVDA)
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