The Big, Scary Semicondtor Shortage  | | Luke Lango | What do Ford, Tesla, Apple, Qualcomm, AMD, Intel, Microsoft, General Motors, and Samsung all agree on? That there’s a massive semiconductor shortage crisis in the world today. Certainly, you’ve heard about this. Every major media outlet has covered it. Every TV personality has talked about it. Every tech company has addressed the issue in their recent conference calls. In short, there’s a lot of demand for semiconductor chips out there right now. And there’s simply too little supply to feed all that demand, which is causing a supply crunch that is hurting everyone from automakers – NIO, Ford, and GM have all had to stop vehicle production – to PC and phone makers. It’s a widespread issue that is impacting all sectors of the economy… because, when you really break it down, almost everything from your phone, to computer, to your car, to your TV, and much more, has semiconductor chips inside of it. If you’re participating in the markets, you need to understand what this crisis is, what’s caused it, and most importantly, how long it will last. More importantly, you need to understand the implications and the eventual resolution of this shortage, so that you can buy the best innovative tech stocks. Do you? I’ve read dozens upon dozens of articles on this very topic. Most of them did little by the way of telling me why the shortage is here, and none offered any advice as to when it might end. That’s why I’m writing you today – to give you what the mainstream media isn’t giving you… the inside scoop on the global semiconductor chip shortage. Here goes nothing… It all started back in 2019, when stagnating smartphone and PC sales caused a sudden and steep drop-off in semiconductor demand. Global semi sales fell more than 12% in 2019, after two consecutive years of 15%-plus growth. In response to this falling demand, many chipmakers – like Micron, SK Hynix, and Samsung – curbed output throughout 2019. So, heading into 2020, the semiconductor industry was already dealing with a limited supply situation. Then Covid-19 hit. Semiconductor foundries across the world shut down. The global supply chain was massively disrupted. Utilization collapsed. Production ground to a halt. And that was all fine and dandy for a few months – because demand for semiconductor chips was relatively weak the second quarter of 2020, as consumers weren’t going outside, let alone buying a bunch of new phones or cars. But then demand surged. Over the past two to three quarters, the combination of mass vaccinations, consumer fatigue, improving treatments, low interest rates, a few rounds of stimulus checks, and easing restrictions has led to a surge in spending on things like cars, phones, computers, etc. – you know, all stuff that is built on top of semiconductor chips. This demand surge has not been accompanied by a supply surge. There are two big reasons here. One, companies have walked a finer line than consumers when it comes to “Covid caution.” Whereas consumers can just decide one day to go and buy a new phone, businesses have had to be more cautious, and have therefore been much slower to “normalize” than consumers. Thus, while demand for semiconductor chips was surging in the fourth quarter of 2020, chipmaker production capacity was still relatively constrained. Second, although chipmakers did “wake up” in the first quarter of 2021 and took steps to increase fab capacity utilization, doing so is a multi-month ordeal. Because of the highly complex nature of producing semiconductor chips, increasing fab capacity utilization is a 26-week process. That’s half a year… To make matters worse, Texas was hit with unusually bad weather in February which shut down chip production in that state for a whole month, and more importantly, there was a fire at Japan’s Renesas Semiconductor Manufacturing Co. Ltd. in March which halted production and which will likely keep production halted until summer. And so, that’s how we got to where we are. A world with huge semiconductor demand and very limited supply. Now, the million-dollar question: When’s it going to end? Elon Musk & Co. are doing their part to secure Tesla’s supply of semiconductors, taking the unusual step of paying in advance. According to the Financial Times, Tesla is in discussions with operators in Taiwan, South Korea, and inside the U.S., to bolster its chip supply. Meanwhile, Tesla is reportedly also interested in outright buying a semiconductor plant in order to get its hands on the much-needed supply of chips. And many contract chipmakers have taken steps to secure upfront deposits, and in exchange, they are guaranteeing customer orders at a fixed price. Still, it’s going to get worse in the second quarter of 2021, before getting better in the second half of 2021 and likely resolving in 2022. Several carmakers have already idled their plants, and many have closed them, as the semiconductor drought disrupts the industry. As stated before, help is on the way. Every major chipmaker out there is taking steps to increase capacity utilization. But those initiatives started in early 2021 – and they take six months – so you won’t see any supply boost from increased utilization until summer, meaning the market will remain supply constrained in 2Q21. At the same time, consumer demand for cars, phones, and computers will likely accelerate in the second quarter as the economy continues to normalize, meaning that the semiconductor industry’s supply-demand dynamics will become more imbalanced in May and June. Then the utilization benefits will kick in. Fab capacity utilization is expected to jump toward record-high 97% rates by the third quarter of 2021. In that quarter, a ton of supply will enter the market, and demand will also taper off along with pent-up consumer demand. The increased utilization relief will stabilize the semiconductor market in the back half of 2021. The industry will still remain supply-constrained, however, as utilization increases alone won’t full satisfy what is a very quickly growing demand for semis, thanks to emerging technologies like AVs, AI, 5G, and more. To that, you need big capacity additions. You need new fabs. Chipmakers have started to break ground on these new fabs. Taiwan Semiconductor Manufacturing plans to invest up to $100 billion in new fabs over the next three years. Intel said its going to drop $20 billion in upgrading its existing fabs. Samsung’s capex this year will measure $28 billion on new fab construction. The U.S. government is getting in on this game, too, pledging to spend $50 billion to build-out domestic chip-making infrastructure. There’s a ton of new capacity coming online, which when coupled with increased utilization, will solve the semiconductor shortage crisis. But it takes anywhere from 12 months to 36 months to get a new fab up-and-running – meaning this new capacity won’t be “live” until 2022, at the earliest. And that’s why the semiconductor shortage crisis won’t be fully resolved until 2022. What’s the investment implication here? If you’re a long-term investor, nothing. The semiconductor market always operates in cycles. It goes from high-demand, low-supply periods, to low-demand, high-supply periods. This is par for the course. It changes nothing about the long-term investment picture. But, in the near-term, it means that the recent pressure on EV stocks, PC stocks, and phone stocks will prove to be short-lived – and that it’s time to buy those stocks on the dip. Which names should you be looking at? I’ll tell you… in my exclusive, new venture-capital-style research platform, Innovation Investor. Click here to subscribe and find out how turn this semiconductor shortage crisis into your opportunity. Sincerely, 
Luke Lango
Editor, Hypergrowth Investing On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this video. By uncovering early investments in hypergrowth industries, Luke Lango puts you on the ground-floor of world-changing megatrends. It’s the theme of his premiere technology-focused service, Innovation Investor. To see Luke's entire lineup of innovative, bleeding-edge stocks, become a subscriber of Innovation Investor today. | 
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