Computer chips are a critical part of the modern world. They're used in everything from iPhones to fighter jets, and without them, much of the technology that makes daily life possible in 2021 simply wouldn't be able to exist.
So what happens when we can’t manufacture enough? We are currently experiencing a global computer chip shortage, and today we’re going to talk about what this means for the markets.
📰 Headline Translator
Breaking down some of today's biggest headlines
Disney is reporting their earnings today, and few are optimistic
After months of lockdowns, park closures, film shutdowns, and more investors are wary of what Disney will report on their earnings call this afternoon. The company’s possible saving grace is if streaming growth acts as a counterweight to the weakness in its more virus-affected sectors. Their streaming platform boasted 86.2 million subscribers as of Dec. 2 after only becoming available a little over a year before. They expect to have 230 million-260 million global subscribers by the end of fiscal 2024, but many wonder if that will be able to make up for the losses in virtually every other area of Disney's business.
The big tech hopping spree continues
Startups beware; The last few years, we’ve seen a rise of smaller tech companies being snatched up left and right by the giant incumbents. Salesforce acquiring Slack, Uber taking Postmates, and Facebook even buying up Giphy. Big tech is relying on the innovation of small, more agile startups to develop new ideas, and Microsoft hanging out around Pinterest is no expectation. It's not hard to see why: Pinterest's market value has soared over 600% during the course of the pandemic as it blew away investors with its robust growth in revenue and users. As more people continued to spend their time online, the 11-year-old company added a record 100 million daily active users to its platform in 2020.
Bumble’s IPO went really, really well
The woman-forward dating, networking, and friend connecting app Bumble started trading today, offering 50 million shares, which they raised from 45 million, at $43. By the afternoon, share value jumped 78%, nearly to 76.80. The company had 2.4 million paying users at the end Q3 2020, up from 2.1 million a year ago. And I have to shout out this blurb from their filing: "We are rewriting the script on gender norms by building a platform that is designed to be safe and empowering for women, and, in turn, provides a better environment for everyone."
As we all began to work or school from home during the pandemic, we have been relying on technology to keep us connected to each other. PC sales were up 4.8% in 2020, with over 10% growth in the holiday season. That reversed a years-long decline, and is the highest annual growth in the PC market since 2010.This demand has exposed issues with our current infrastructure for manufacturing computer chips, leading to a shortage that threatens to snarl electronic manufacturing around the world.
The big demand for electronics, along with shifting to outsourcing production, and effects from former President Donald Trump’s trade war have created a perfect storm of computer chip demands. One chipmaker told the Wall Street Journal that backlogs were now so big, it would take over 3 months to fulfil any order that's placed today.
👎🏼 The Losers
This could have huge knock-on effects that could spiral out if it is not addressed in the long term. In the meantime, these are the industries that are being affected the hardest:
🚙 Car Manufacturing
Cars now include scores of tiny chips, many of which perform functions like power management, automatic braking, and engine sensors. Cars also use a lot of microcontrollers, which can control traditional automotive tasks like power steering, or are the brain at the heart of an infotainment system. Early in the pandemic, the automotive industry saw a big dip in demand and cut its orders. As a result, chipmakers switched over their production lines. But then, in the third quarter of 2020, sales of cars came roaring back more quickly than anticipated, while demand for consumer electronics continued unabated.
GM is now warning of a $2 Billion loss in 2021 due to the shortage. Ford, Honda, Volkswagen and others have lowered their auto manufacturing plans because of shortages of semiconductors and other components. Even if production is able to increase quickly, the automotive industry is a lower priority than the electronics companies; in 2020, only 3% of chips were purchased by the automotive industry, compared to 48% for smartphones.
The one exception here seems to be Toyota, who said that it doesn’t expect to reduce its rate of production because it foresaw the shortage and stockpiled four months worth of chips. Toyota raised its full-year earnings forecast by 54%.
Have you been finding it difficult to get the new Playstation 5? That's not just fabricated shortages to create the illusion of hype; PS5 and Xbox Series X chip-maker AMD is being strongly affected by the supply constraints, many predict that console shortages will continue until the end of the year because of it.
AMD warned last month that exceptional demand driven by the pandemic will continue to affect its ability to produce Xbox Series X and PS5 chips. AMD CEO Dr. Lisa Su admitted that shortages will continue until the middle of 2021 during the company’s fourth quarter and full year 2020 results. While the custom console chips brought in $1.28 billion in sales, AMD expects to see “tightness” throughout the first half of 2021 until more production capacity becomes available.
After years of chatter about the magic we will be able to unlock with 5G networks, this chip shortage is now the one thing standing in between us realizing it. The chip shortages also have impacted handheld tech, just as production is ramping up for 5G enabled devices, such as Apple's iPhone 12, the Samsung Galaxy, hotspots, or other devices.
Apple, which recently reported a blowout $111 billion quarter, told analysts it didn’t have enough supply of its new iPhones to meet demand. CEO Tim Cook told Reuters that “semiconductors are very tight,” and reports that the record sales could’ve been even better if there was enough supply.
🏆 The Winner: Semiconductor Manufacturing
While there are no doubt losers from the chip shortage, there are also some big winners. Global semiconductor sales are also rising with demand, and the companies that can deliver will succeed. Four companies stand out as having the strongest position to benefit from the shortage: Taiwan Semiconductor Manufacturing Co., NVIDIA Corp, Advanced Micro Devices Inc, and Ambarella Inc.
Taiwan Semiconductor Manufacturing (TSM) is the largest dedicated integrated circuit foundry, and analysts expect earnings to grow more than 18% this year and Taiwan has asked TSMC to prioritize meeting auto chip demand. Advanced Micro Devices is also positioned to capitalize on the tech boom, with customers like Microsoft and Google relying on them for gadget components. NVIDIA and Ambarella round out the group, manufacturing high-quality graphics processing units (GPUs) and systems on a chip (SoCs) that are necessary for modern gaming and AI applications.
With a surge in demand for electric vehicles and gadget sales still growing, these four stocks could be the best way to play the 2021 chip shortage.
🛠 The Fix
With existing manufacturing running at capacity but building factories more is not a simple matter. It takes about 18 to 24 months for a plant to open after they break ground, and even once you've built one, you have to tune it and get the yield up, which also takes a bit of time.
This might also be an opportunity to diversify our chip manufacturing. Economists estimate two Asian nations, Taiwan and South Korea, account for 83% of global production of processor chips and 70% of memory chips. Like Opec was for oil, Taiwan and South Korea are near monopoly producers of chips, and left unchecked, their market share is set to grow further.
This has raised concern in the States, where one lobby group calling the current crisis the "canary in the coal mine" for future supply-line shortages. And a group of 15 senators have written to President Biden urging him to take action to "incentivize the domestic production of semiconductors in the future".
Word of the Day
(n) A manufacturing method where the production process only begins when a customer places an order, and inventory stock is only delivered as-needed.
Companies use this strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, saving on inventory costs. However, this method requires producers to forecast demand and supply very accurately.
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