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Chip Shortage May End Semis' Perfect Storm Prematurely

Kwan-Chen Ma profile picture
Kwan-Chen Ma


  • The second leg of the prolonged chip shortage has finally started causing some real damages to semi-related companies.
  • Both the fading WFH trend and slowdown recovery may wipe out the previously unfilled demand. The prolonged chip shortage already forces many companies to reduce production.
  • Both the slowdown in demand and in production may shorten the life span of the "perfect storm," which has benefited semis up until this point.
  • Semis, as a group, have factored in the impact from the chip shortage. Generally, semis with larger (smaller) chip supply exposures have underperformed (outperformed) the SOX Index.
  • QCOM, NVDA, and AAPL have relatively overstated the chip shortage impact, while ADI, AVGO and ON have understated the chip impact.

Semis' Perfect Storm

The semiconductor industry has benefitted from a "perfect storm" which requires several negative macro events to line up at the same time. The COVID-induced "Work From Home" and "Learn from Home" (WFM, LFH) lifestyle created a surprising surge in demand for semiconductor-related products, while the lockdown interrupted the supply chain of chip production which has already been experiencing a long-term chip shortage. A surge in demand along with a supply shortage allowed semiconductor firms (semis) to raise prices to increase revenue and profit from a perfect combination of negative economic scenarios.

One year after the COVID lockdown, the WFM demand has started to fade after the virus is under control and the stimulus package kicks in. The semi chip shortage has worsened to the point that it has affected real production. Semi shareholders have become increasingly more appreciative of the chip shortage which has turned into a critical supply constraint. In this post, I seek to identify the extent of the supply (chip) shortage risk for the 12 largest US semi companies. Before any shareholders' appreciation of the risk can be measured, I will first examine how semi firms got to this point of chip shortage.

GM's "Just-in-Time" vs. Huawei's "Ahead-of-Time"

Amid the COVID lockdown and subsequent drop in auto sales (Q1 2020), General Motors' (GM) "Just-In-Time" inventory system cancelled or delayed their chip orders from the major chip suppliers, Taiwan Semiconductor Manufacturing Company (TSM) and Samsung (OTCPK:SSNLF). The chip capacity free-up was moved to meet part of the semis' WFH demand as both TSMC and Samsung have always been at full capacity. When the auto demand rebounded sharply in 2H 2020, GM could not meet the car orders due to the loss in the chip production queue. GM estimated that it will lose $2 billion in

This article was written by

Kwan-Chen Ma profile picture
K C Ma, Ph.D, CFA, is the Eminent Scholar and the Mary Ball Washington/Switzer Brothers Endowed Chair of Finance at University of West Florida. I am the Director of Argo Investments Institute which enables college students to manage real money stock, bond, and option funds. I manage market-neutral institutional hedge funds in KCM Asset Management. I write about stocks, bonds, and derivative strategies, long or short, based on our quantitative processes.

Analyst’s Disclosure: I am/we are long NVDA, AMD, AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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