How the chip crisis is hurting stocks
What are the best stocks to buy in the wake of the global semiconductor shortage?
The global shortage of semiconductor chips is a very real and very serious issue. Companies across the world and in all manner of sectors are being very badly hit by the semiconductor shortage.
For those unaware of what a semiconductor is and does, and why this shortage is such a big deal, a semiconductor is a physical substance designed to manage and control the flow of current in electronic devices and equipment. The chips are the physical materials used to conduct electricity in these devices, and so are an essential ingredient in powering the cars, mobile phones, personal computers and virtually thousands of electronic devices we all use every day. And as millions of businesses around the world are reliant on electronic devices such as computers to do their work, any lack of such vital equipment can have a devastating impact on their proper functioning, and therefore on the economy. Therefore, in the wake of the chip shortage, stocks across multiple sectors have also been affected.
However, things are not quite as straightforward as they might initially appear, and the impact of the semiconductor crisis on stocks and shares has not been as straightforward as one might think it would be.
Why is there a chip shortage?
The worldwide shortage of semiconductors began in March 2020, when the Covid-19 pandemic was picking up and governments all around the world were implementing restrictions. One of the biggest changes was that people were told to work from home. Now, this was all very well for those who had a fast computer with sufficient memory, but many people didn’t. This meant that more and more people went and bought new computers, which meant that the demand for semiconductor chips went up.
In the face of this increased demand, the companies that made semiconductors were only able to increase their output by so much. This was not a problem – at least at first – because car-manufacturing plant work was being put on hold, with workers having to remain home. This meant that the chips that would have gone into making new cars were being diverted to supply computers, which also meant that people were able to get new and better computer equipment for working from home. This meant that although the demand for semiconductor chips went up, it was satisfied.
Eventually, of course, the car factories had to reopen, meaning that demand for chips from this sector began to increase. As they used more chips, this also meant the availability of semiconductors began to increase.
Although it may initially appear that the global semiconductor shortage was something no one could have predicted, that may not actually be the case.
Back in February 2020, Semiconductor Engineering magazine reported that demand for the 200mm fab boards, which are then split up into lower-cost chips, was increasing, which could put chips and chipmakers under extreme pressure. It predicted at the time that the growing pandemic virus outbreak in China also meant that there was a very real risk of a future chip shortage.
There were also other factors which led to the shortage. For example, chip factories use ultra-pure water to clean their equipment. In 2021, Taiwan – one of the world’s biggest manufacturers of semiconductors – suffered a drought. This meant there was not enough water to carry out cleaning, which meant that production slowed.
The matter was exacerbated by the fact that many countries, particularly the US, rely on Taiwan for their semiconductors. This is because in 2020, the US government put restrictions on the major Chinese chip-manufacturer, Semiconductor Manufacturing International (SMI), which made it very hard for SMI – China’s biggest semiconductor maker – to sell its product to American firms. This meant they had to look elsewhere. As a result, demand at non-Chinese chip plants grew until they were operating at full capacity and began to experience the inevitable shortages we see today.
There were other, more temporary issues that also had an impact on the situation. In February 2021, a massive winter storm halted semiconductor production in factories in Texas, while a fire at the Renesas plant in Naka, Japan, in May, also caused problems with output.
One important thing to note is that, despite the length of the semiconductor shortage, stocks may not have initially gone down because of it. Remember that the Covid-19 pandemic lockdown situation hit many share prices hard, so this also affected semiconductor firms.
Semiconductor shortage stocks
Danni Hewson, a financial analyst with British investment firm AJ Bell, said: “It’s almost impossible to fathom exactly how different companies will be able to cope with the supply issues, but price pressures are making markets increasingly jittery as investors consider that rising prices won’t be as transitory as had first been thought.”
She added: "In terms of which stocks are doing well and which are doing badly, it’s not as easy as picking a sector and assuming, that chip makers, for example, will be quids in.”
Hewson pointed to the example of US computer systems design services company Nvidia, whose shares had risen by more than half since March, as opposed to US semiconductor companies Qualcomm and the Taiwan Semiconductor Manufacturing company (TSM), whose prices had gone down slightly, as an example about why you can not make assumptions about stock in semiconductor companies. In this way, she indicated that there is no real answer to the question of what semiconductor stocks to buy now. She also argued that, just because there was a semiconductor shortage, stocks in companies that use chips would not automatically go down, even if the company revenues declined as a result of the shortage.
Hewson said: “While car-makers like Ford have lost revenue, Ford’s share price is actually up since the end of March because consumers have been willing to pay a bit more for the truck they really want.
“Ford has also been savvy by making the most of the situation and changing the way consumers buy cars, which will ultimately cut supply time and save cash. But more cuts in production have just been announced, and the company’s boss has been upfront that the hoped-for resolution by the end of this year is no longer on the cards.”
Currency.com contacted Ford, but did not receive a comment.
When will the chip shortage end?
Hewson suggested things are likely to carry on as they are since the chip shortage is showing no sign of stopping.
She said: “Because the situation is so fluid, at the moment, pent-up demand and lockdown savings have meant consumers are either willing to wait a bit longer for a product or pay a little more. [So] we’ve probably not seen the full impact work its way through.
"Initially it had been assumed the supply shortage would be short-lived, but the surge in demand that came smack in the middle of Covid-19’s disrupting force has left the world’s chip-makers struggling to walk in place. It’s likely to be at least next summer before issues begin to be resolved, and that’s dependent on no further variants requiring additional lockdowns.”
Her comments were backed up by Marvell CEO Matt Murphy, who told CNBC: “If it stays business as usual, and everything’s up and to the right, this is going to be a very painful period, including in 2022 for the duration of the year.”
Businesses’ comments on the shortage
Companies themselves were a bit cagier about responding to questions about the shortage. A spokesman for Samsung said: “The current volatility of the semiconductor market is being felt across the entire technology industry and beyond. At Samsung, we are making our best efforts to mitigate the impact, and we will continue to work diligently with our partners to overcome supply challenges.”
Meanwhile, spokespersons for Sony, Ford, GM, Volkswagen, Renault, Hewlett-Packard, Toyota, Peugeot, Nissan, TSMC, Nvidia, Microsoft, Apple, Micron and Intel did not come back with a response to queries, despite being given days to do so.
While one might think stocks in companies that make semiconductors would be the real semiconductor shortage stocks, and the ones that used chips would do badly, that is not necessarily the case. You will have to do your own research before investing.
Basically, as car manufactures resumed business post-lockdown, a previous increase in demand for chips for personal computers hit hard, meaning there were not enough semiconductors to go around. That’s the short answer, anyway.
We don’t know. It is worth noting that experts and people in the industry think it should be going on for at least another year, to one extent or another. Regardless, if you feel the need to invest in stocks related to semiconductors, you should take care – remember prices can go down as well as up, and never invest more money than you can afford to lose.