A Watch List for Trading the Chip Addiction

A Watchlist for Trading the Chip Addiction

Originally published on May 21 2021 by TraderStef at CrushTheStreet

The global semiconductor shortage has governments and the companies that fabricate chips and the machinery to build them racing to expand capacity to meet demand while staying ahead of technological advances (Moore’s Law). Some companies only design chips, while others manufacture them or create the machinery that’s needed to fabricate them. To help the United States break away from its reliance on foreign manufacturing, the U.S. Senate has proposed billions to dramatically boost the domestic semiconductor research and production industry over the next five years. President Trump already had the ball rolling with increased funding and a deal for a new manufacturing plant on U.S. soil.

U.S. senators close to announcing $52 bln chips funding deal… “Supporters of funding note the U.S. had a 37% share of semiconductors and microelectronics production in 1990; today just 12% of semiconductors are manufactured in the United States… The chips funding is expected to be included in a bill to spend more than $110 billion on basic U.S. and advanced technology research to better compete with China… ‘There is an urgent need for our economic and national security to provide funding to swiftly implement these critical programs. The Chinese Communist Party is aggressively investing over $150 billion in semiconductor manufacturing so they can control this key technology,’ the summary says. The measure would ‘support the rapid implementation of the semiconductor provisions’ in the defense bill. The draft summary says it would include $39 billion in production and R&D incentives and $10.5 billion to implement programs including the National Semiconductor Technology Center, National Advanced Packaging Manufacturing Program, and other R&D programs.” – Reuters, May 14

Over 50 Years of Moore’s Law… “In 1965, Gordon Moore made a prediction that would set the pace for our modern digital revolution… Moore extrapolated that computing would dramatically increase in power, and decrease in relative cost, at an exponential pace… Moving forward, Moore’s Law and related innovations are shifting toward the seamless integration of computing within our daily lives. This vision of an endlessly empowered and interconnected future brings clear challenges and benefits. Privacy and evolving security threats are persistent and growing concerns.” – Intel 

Governments are deploying ‘wartime-like’ efforts to win the global semiconductor race… “Tiny pieces of silicon with intricate circuits on them are the lifeblood of today’s economy. These clever semiconductors make our internet-connected world go round. In addition to iPhones and PlayStations, they underpin key national infrastructure and sophisticated weaponry. But recently there haven’t been enough of them to meet demand.” – CNBC, May 17

Today, semiconductors are the heart of every computer, mobile phone, military weapon system, cloud datacenter, automobile, wristwatch, TV, toaster, and too many gadgets to mention. The chips are also connecting to each other, and that requires more of them in homes, factories, warehouses, and whole cities that are increasingly interwoven into the Internet of Things (IoT) ecosystem.

That little chip has evolved from a small workhorse inside computers to the most important and expensive element within our modern-day gadgetry. After the explosion in demand over several decades, an unexpected spike across many industries occurred during the pandemic that created an unprecedented supply shock and precipitated the current shortage. In Feb. 2021, lead times for delivery of a chip expanded to an average of 15 weeks for the first time since data collection began in 2017. In comparison, lead times are as high as 22 weeks vs. 12 weeks in Feb. 2020.

Lead Times For Chips March 2017 to February 2021
Sales Revenue of Semicondutors by Industry 2010-2020

With an infusion of capital from Capitol Hill, the next several years look very promising for companies that manufacture the machinery and fabricate semiconductors. Building the chips is extremely complex, with thousands of steps, and companies invest hundreds of millions of dollars into chemistry, engineering, and physics research to refine processes that will meet demand and remain at the forefront of innovation. Fabricating hundreds of chips onto a single wafer can take up to six months. An excellent overview of the current challenge facing the U.S. is the 60 Minutes segment at the end of this article.

IBM Unveils 2-Nanometer Chip – Faster Performance, Less Energy… “It’ll be ready for production as early as late 2024… The 2-nanometer chip is based on IBM’s nanosheet technology and will hold up to 50 billion transistors on a chip ‘the size of a fingernail,’ the Armonk, N.Y., technology company added. ‘The chip will have 45% higher performance and use 75% less energy than today’s 7-nanometer node chips,’ IBM said.” – CNBC, May 7

Intel Pentium II Processor Commercial (1997)

There are only three major FABs (fabricating facilities) in the world today, with two of them located in Asia and one in the U.S. at Intel. The ongoing pandemic harshly brought to light the fragility of global supply chains since the U.S. is 88% dependent upon foreign FABs. The largest supplier and most advanced FAB is located in Taiwan at Taiwan Semiconductor Manufacturing ($TSM), and the island nation is currently experiencing a surge in pandemic cases after avoiding a major wave.

Taiwan Aims to Keep Chip Production Humming as Covid Spreads… “Taiwan’s government pledged to try to keep the world supplied with chips even as Covid-19 cases escalate, while anticipating a limited impact from its worst outbreak so far… An explosion of coronavirus cases this month, compounded by the impact of a worsening drought and periodic power cuts… U.S. officials and executives have voiced concerns about the world’s dependence on chips from the island, which hosts the highest-end facilities of industry linchpins Taiwan Semiconductor Manufacturing Co. and ASE Technology Holding Co.” – Bloomberg, May 18

How did Covid slip through Taiwan’s ‘gold standard’ defenses?… “The Island state went 253 days without a single case but now the number of cases is rising sharply… Dr Chiou Shu-ti, former health commissioner of Taipei, said authorities were ‘playing with fire’ by relaxing the requirements while being ‘complacent’ with testing of arrivals… she warned authorities against following the mitigation strategies of the UK or US instead of aiming for elimination. She called for an immediate nationwide quasi-lockdown and mass testing… She said Taiwan had been ‘stupid’ in focusing testing on people who presented with symptoms and also had a travel history or connection to a confirmed case, rather than one or the other… ‘Everyone knows that Covid-19 can spread before the onset of symptoms.’” – The Guardian, May 17

One example of how the pandemic asymmetrically impacted global supply chains and created a chip shortage is the automotive industry.

  • GM and Ford cutting production in North America due to chip shortage – CNBC, Apr. 8
  • China Stockpiles Chips for Autos, Exacerbating Chip Shortage – Epoch Times, Apr. 14
  • Intel Says Chip Shortage to Last Two Years as Car Makers Endure – Barron’s, Apr. 28
  • Global Chip Drought Hits Apple, BMW, Ford as Crisis Worsens – Bloomberg, Apr. 28
  • Chip Shortage Forces Carmakers to Leave Out High-End Features – Bloomberg, May 7
  • Chip shortage expected to cost auto industry $110 billion in 2021 – CNBC, May 14
  • 1,600 Layoffs Coming at Northern Illinois Jeep Cherokee Factory – CNBC, May 15

Here is a watchlist of semiconductor industry stocks to keep an eye on:

Semiconductor Watchlist by TraderStef May 2021

Chip shortage highlights U.S. dependence on fragile supply chain… “Lesley Stahl talks with leading-edge chip manufacturers, TSM and Intel, about the global chip shortage and the future of the industry.” – 60 Minutes, May 2 (screenshot is hyperlinked)

60 Minutes Chips Shortage Screenshot

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