AMD Stock – The chip crunch marches on, but one sector could be in store for relief
Supply shortages for the chip industry are still expected to last into 2022, but shifts in the past three months indicate subtle but significant changes in the auto and PC end markets.
Auto makers, one of the hardest hit industries by COVID-19 pandemic chip shortages, gained some ground as chip fabricators started reserving more of their capacity to make crucial components for modern automobiles. On the other end, PCs and laptops, which saw a significant and unexpected surge in sales because of the pandemic, are starting to show signs of a peak.
By all indications, the PC market for chips is “very strong,” for auto “even stronger,” and demand from industrial customers is still strong, “but that’s the biggest black box right now,” Bernstein analyst Stacy Rasgon told MarketWatch in an interview. By “black box,” Rasgon means that industrial chip customers number in the thousands and aren’t within a centralized category like auto makers or PC makers, so market data is difficult to pin down. Smartphone demand has been kind of weak, Rasgon said, but a new Apple Inc.
iPhone cycle may make the second half of the year stronger. “It’s going to be an interesting earnings season,” he said.
The tricky part, however, is trying to figure out how much of the demand is going to satisfy orders of equipment, and how much of it is being squirreled away like last year’s toilet paper because of the current shortage.
A situation like that rocked the chip industry in 2018, when semiconductor prices were soaring and customers were double- and triple-ordering chips for later in order to lock in relatively lower prices. While chip makers were reporting record results at the time, that all fell apart when demand suddenly fell off a cliff because customers had such large chip inventories there was little reason to buy any more. That, in turn, left chip makers with huge inventories they couldn’t sell, leading to an industry-wide chip glut that took several quarters to work through.
“Demand is getting stronger, and that’s one of the unknowns,” Bernstein’s Rasgon told MarketWatch. “Typically, when people can’t get the parts they need, they order more. So, demand looks stronger but we don’t know how much of demand is real and how much of it’s phantom.”
The coming earnings reports from chipmakers and customers could give signals about the future. Micron Technology Inc.
reported a beat-and-raise quarter recently, but investors appeared more concerned about how long the memory chip maker would benefit from the shortage as it gets mitigated and whether the current boom was all a set-up for a repeat of 2018’s boom and glut.
Read: The semiconductor shortage is here to stay, but it will affect chip companies differently
Micron’s earnings report roughly marks the end of one earnings season for U.S. chip-related stocks, with Intel Corp.
and Texas Instruments Inc.
earnings beginning another one roughly three weeks later. Intel is expected to report earnings on July 22, and Texas Instruments on July 21.
This upcoming earnings season, investors will want to look at movement at the extremes of the supply shortage, namely, auto chips, which have suffered the worst of the shortage, and PC chips, which benefited from the sudden demand of the COVID-19 pandemic and quickly filled up the schedules of the fabs that make the silicon wafers used to make chips.
Major automobile chip suppliers include Texas Instruments, Analog Devices Inc.
Netherlands-based NXP Semiconductors NV
Germany’s Infineon Technologies AG
South Korea’s Samsung Electronics Co.
and Japan’s Renesas Electronics Corp.
This past earnings season Texas Instruments, Analog Devices, and NXP all topped expectations, and probably would have even done better if they could have made more of the chips auto makers were demanding.
Raymond James analyst Chris Caso said he expects capital expenditures at analog chip makers — the type that supply the auto industry like Texas Instruments, Analog Devices, and NXP — to rise in the second half of 2021 after several quarters of low investment.
“Our analysis shows that analog industry capex spending has been running well below expected sales growth and below historical trend as a percent of sales for the past several quarters, through 1Q21,” Caso said. “That’s the reason for the current supply shortages, because analog suppliers cut back on capex during the pandemic last year, and haven’t yet caught up.”
While a similar peaking in capex also occurred just before the 2018 glut, Caso doesn’t think a repeat is in the offing unless capex spending gets out of hand.
“We don’t think that’s a problem just yet, and the very low levels of inventory give us additional confidence that we won’t experience a supply/demand imbalance this year,” Caso said. “But rising capex raises the risk that the supply/demand balance could become unfavorable next year, particularly if the high level of spending in 2H21 continues into 1H22.”
In June, General Motors Co.
said it expected the first half of the year to be better than first thought as it was trying to sidestep problems created by chip shortages, which would continue to hamper production through July. GM next reports results on August 4. Ford Motor Co.
reported a “massive” earnings beat back in late April, but forecast more production cuts because of the chip shortage and confused some analysts with its outlook for the year. Renault
Chief Executive Luca de Meo recently said that he expects the chip shortage to last through next year.
On the other hand, electric-car maker Tesla Inc.
recently reported that it’s faring better than other auto makers when it comes to navigating the chip shortage, revealing it both produced and delivered more than 200,000 vehicles in the second quarter.
While problems persist at auto makers in finding chips, some progress has been made. In April, Intel said it was in talks with companies that design chips for auto makers to start manufacturing those chips in as little as six months.
Also, Taiwan Semiconductor Manufacturing Co.
the world’s largest third-party chip foundry, said that revenue from automotive customers rose 32% sequentially to account for 4% of its $12.9 billion in sales, or about $516 million, and that it expected auto chip shortages to be “greatly reduced” for its customers “by the next quarter.”
TSMC is scheduled to report its fiscal second-quarter earnings on July 15. Additionally, TSMC said in April that its capital expenditure budget for 2021 was $30 billion, up from its $25 billion to $28 billion estimate at the beginning of the year.
Then, in May, TSMC said it was boosting production of auto components by 60% following a U.S. Department of Commerce summit attended by representatives of other tech companies and auto makers.
Even with the chip shortage, PC shipments — including Alphabet Inc.’s
Android-driven Chromebooks — are expected to grow 18% in 2021 to just over 357 million units worldwide, according to industry tracking firm International Data Group.
But strength in the PC sector carries some reason for concern. While many believe the pandemic changed the “one PC per house” paradigm to “one PC per household member,” reactions to the surge in sales amid supply shortages risk setting up an overshoot and another possible 2018 scenario, according to Rasgon.
“Channel analysis indicates that while PCs have been strong, CPU shipments have been even stronger, with processor shipments (especially in notebook) increasingly diverging from PCs, appearing to significantly over-ship for the last several quarters,” Rasgon said in a note. “Hence the data does indeed suggest evidence of potential CPU overshoot, bringing risk if demand falls.” The largest U.S. CPU makers are Intel, followed by AMD.
Even if one accounts for Chromebooks, which some industry watchers exclude from their estimates, Rasgon said that only reduces the overshoot “somewhat” but that “overall trends stay consistent, with a material overshoot in notebooks still apparent even when considering only mainstream systems.”
The most recent numbers from the Semiconductor Industry Association show a big increase of chip sales even from last year, when stay-at-home directives were already driving rapid sales of laptops and gaming consoles. In May, global chip sales surged 26% to $43.6 billion from the year-ago period, or 4% higher than April 2021’s $41.9 billion, setting a record three-month run of sales, according to the SIA.
“The industry shipped more units on a three-month moving basis in May than during any previous month in the market’s history, indicating semiconductor production has ramped up significantly to address rising demand,” said John Neuffer, SIA president and CEO, in a statement.
Those May numbers alone should make for a strong upcoming earnings season, where the industry is on track to report total 2021 sales of about $526 billion with that expected to rise to $603 billion in 2022, said Evercore ISI analyst C.J. Muse in a note.
Also, company surveys conducted by Evercore for June indicate the most positive outlook for the semiconductor industry since May of 2000, Muse said.
Jefferies analyst Mark Lipacis said his data from supply-chain experts indicate that supply shortages will last in to 2022, but when in the year differed by geography.
While lead times — the amount of time it takes between an order and a delivery — are stabilizing “at high levels in Europe due to summer holidays,” the analyst’s sources don’t expect a normal supply situation before the first half of 2022. Meanwhile, in the U.S., lead times are still increasing, with sources telling Lipacis that they’re not expecting a supply-demand balance until the third quarter of 2022.
Over the past 12 months, the PHLX Semiconductor Index
has grown 58%, while both the S&P 500 index
and the tech-heavy Nasdaq Composite Index
have advanced 39%.