Semiconductor Shortage Squeezes Automakers as Chip Demand Surges Like Never Before

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A shortage of semiconductors is sweeping the economy as demand for connectivity surges in the wake of the coronavirus pandemic.

Companies including General Motors (GM), Ford Motor (F), Apple (AAPL) and Enphase Energy (ENPH) have mentioned difficulties obtaining chips in their quarterly reports this earnings season. GM said the problem may reduce full-year earnings by as much as $2 billion.

The shortage results from supply-and-demand issues. The initial wave of lockdowns last March and April shuttered car plants. Semiconductor companies reduced production of automotive chips to meet surging demand for PCs as millions of people worked and studied from home. Now, as vehicle sales rebounds, chip factories are struggling to keep up.

“This supply-demand imbalance cannot be remedied with the ‘flip of a switch’,” Falan Yinug of the Semiconductor Industry Association said in a blog post last week. “Making a semiconductor is one of the most complex manufacturing processes. Lead times of up to 26 weeks are the norm in the industry to produce a finished chip.”

Philadelphia Semiconductor Index ($SOX), weekly chart.
Philadelphia Semiconductor Index ($SOX), weekly chart.

Semiconductor Capital Spending

Research firm IHS Markit estimated last week that the current squeeze will last through the third quarter. That means semiconductors are likely to remain one of the most active corners of the market for months into the future.

A takeaway for investors could be to focus on the semiconductor-equipment companies that provide machinery and supplies. Those may benefit most directly as chip makers invest to expand production. Already, giant chip foundry Taiwan Semiconductor (TSM) has pledged to spend at least $25 billion on new capacity this year.

Here are some key semiconductor supplier stocks:

CompanyMarket CapYTD %Last Earnings
ASML (ASML)$238 billion+16%Beat estimates
Applied Materials (AMAT)$97 billion+23%Reports 2/16
Lam Research (LRCX)$76 billion+13%Beat estimates, strong guidance
KLA (KLAC)$46 billion+15%Beat estimates, strong guidance
Teradyne (TER)$21 billion+7%Beat estimates

In conclusion, the chip industry was surging even before coronavirus. Like many things tech-related, demand has only improved in the last year. Investors may want to follow some of the companies exposed to the trend.

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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.