U.S. Chip Shortage is Real
Yes, the price is going up. And no, I am not talking about monthly grocery bills, but the price of semiconductor chips that help operate iPhones and will power autonomous driving vehicles.
The situation is so dire that US President Joe Biden signed an executive order calling for a supply chain review of semiconductors and IT technologies.
Yes, it’s that bad.
The drastic and imminent chip shortage is impacting a wide swath of tech firms we cover here at the Mad Hedge Technology Letter.
The order will also “facilitate needed investments to maintain America’s competitive edge and strengthen U.S. national security.”
Biden’s proactive decision to sign the executive order comes on the heels of several top U.S. semiconductor executives persuading US President Joe Biden earlier this month to resuscitate domestic chip manufacturing with “substantial funding” as part of the White House’s economic recovery and infrastructure plan.
In the fact sheet for the executive order, the White House said supply chains for semiconductors and advanced chip packaging technologies will be among four key areas where federal agencies will be directed to commence a 100-day review.
The White House acknowledged a massive underinvestment in semiconductor production that has caused manufacturing to shift abroad.
The critical issue was emphasized by U.S. semiconductor executives in a recent joint letter to Biden.
The US has leaned on foreign manufacturing for many products in the past 50 years, but semiconductor chips are the ones that could force US tech companies into a losing position and offer a pathway for Chinese tech firms to seize their chance as top dog.
The 100-day supply chain review will also look at critical minerals, including rare earths that are used for a variety of products, as well as large-capacity batteries and active pharmaceutical ingredients.
The shortages of chips and other components are a very real issue that can have a material impact on several adjacent industries, including bioinformatics companies and mechanical parts manufacturers that rely on simulation and modeling applications.
How does this affect chip companies?
Let’s take a look at one, Western Digital (WDC).
Shares are trading higher on signs of improving pricing in the flash-memory market.
I am short-term bullish on Western shares because a meaningful memory-chip price rise is in the cards for both flash NAND and DRAM.
A blast from the past Silicon Valley dinosaur that began as a disk-drive manufacturer, Western diversified into flash-memory products via its 2016 acquisition of SanDisk.
Encouraging NAND pricing also benefits Micron Technology (MU), which makes both NAND and DRAM chips.
The most important takeaway from my channel checks is that despite increased attempts by cloud and enterprise customers to lock in prices for second-half delivery, end contract numbers aren’t reflecting any good deals for the end buyer.
Manufacturers are convinced with their newfound pricing power and will wield it to full effect.
Expect significant price increases until the shortage is cured, and this could result in many end projects being shelved because of funding issues.
For semi chip firms, a bountiful harvest will make 2021 earnings report glisten in the form of meaningful expansion in margins, which have been under pressure since 2018.
My initial prediction is that prices will rise 5% to 10% from the fourth quarter—and that pricing for the second quarter is tracking up another 10% or more sequentially making it a 20% rise in less than half a year.
Memory manufacturers like Micron (MU), AMD (AMD), Samsung, and Western Digital (WDC) are in line to overperform in 2021.
