If you haven’t heard, semiconductor chips have been all the news lately. Alright, maybe not all the news, but more than usual. And as Jim Cramer said, “Believe me, you’re going to start hearing about this shortage constantly, daily, because it’s wreaking havoc with all sorts of industries.”
Currently, there is a shortage of semiconductor chips.
When I see a situation like this, I see money. It all comes back to the first day of Econ 101; simple supply and demand. If quantity demanded is greater than quantity supplied, there’s a shortage. And therefore, price goes up.
What are semiconductor chips?
I’m not a scientist. And I have no engineering experience. So my understanding of semiconductor chips is limited. Hitachi High-Tech GLOBAL defines them as, “A semiconductor chip is an electric circuit with many components such as transistors and wiring formed on a semiconductor wafer.”
What they do though can be explained in layman’s terms, they store and process information.
Used mainly for computers, they have become increasingly popular over time. As cars, consumer goods, and almost everything else becomes more electronic, chips have become more involved.
According to the Semiconductor Industry Association, global semiconductor sales are projected to increase 8.4% in 2021.
Why have they been in the news recently?
Semiconductors power more and more devices and technology processes every day. As we move even more to a digital age, more semiconductors will be needed. They are used in phones, cars, military weapons, smart technology, and more.
Another popular news topic the last year has been electric vehicles. Whether it’s new names such as Tesla or Nio, or old companies such as Toyota, everyone is trying to make an electric car nowadays.
General Motors and Ford are not the first names you think of when you hear electric vehicles. But they’re becoming players in the market. At their most recent announcement, GM announced, “a global semiconductor chip shortage could cut its earnings by $2 billion this year.”
Ford is in the same boat. They announced they are cutting production at certain plants due to a global semiconductor chip shortage.
Semiconductors are used in new vehicles for areas ranging from infotainment systems to power steering. They are also used in consumer electronics, which have seen an increase during the pandemic as people are stuck at home.
Last year people bought PCs, monitors and other gear for remote work or school. Entertainment products like consoles, TVs, and smartphones were popular purchases too.
So more cars need chips, more consumer products need chips. But this situation is more than just about increased demand.
The industry is also changing. Many of the top semiconductor companies now only design the chips and their technology, then contract with another company that produces the actual chip. This can cause issues with supply chains.
Politics came into it too. Last year, the U.S. placed restrictions on Semiconductor Manufacturing International. Customers had to shift their orders to competitors. This restriction caused some to stockpile chips.
Essentially, the semiconductor shortage is because of the strong demand for electronics and electric vehicles, a change in the industry’s business model, and the effects of the U.S. trade war with China.
How to play the shortage
The two most “popular” semiconductor chip stocks are Nvidia and AMD (Advanced Micro Devices.) Both of these stocks have been amazing the last five years. On Feb. 10, 2016, Nvidia closed at $25.43. Five years later (Feb. 10, 2021), Nvidia closed at $590.57. That’s a 2,222% gain. That. Is. Ridiculous.
But, that’s not even half of what AMD gained in that time span. AMD closed at $1.84 on Feb. 10, 2016. It closed two days ago (Feb. 10, 2021) at $92.35. A 4,919% gain.
It’s obvious both these stocks have done well in the past. But will they continue to do so in the future is the question.
Another big name in the industry is Intel. They are your old-school, blue-chip stock. They are a large player in the chip space, but they also participate in several other industries. As a result, their stock has not gone up thousands of percentage points in the last five years.
There is also Qualcomm as an option. Again they are a bigger name and their stock has not grown as much as Nvidia or AMD.
When making your investment decision, consider the advice from Chamath Palihapitiya, “Pick winners.”
If you don’t want individual stocks, there are several ETFs that represent the semiconductor space.
- VanEck Vectors Semiconductor ETF (SMH)
- iShares PHLX Semiconductor ETF (SOXX)
- Invesco Dynamic Semiconductors ETF (PSI)
There are many more ETFs that represent the industry, these are just three I’m familiar with. In addition to other ETFs, there are plenty of other semiconductor companies I didn’t list. Maybe one will be the next AMD and gain almost 5,000% in five years, or maybe will fall by 50%.
Whatever happens, best of luck.