By Wallace Witkowski
The global semiconductor shortage, sparked by pandemic-influenced demand spikes, reportedly led to a near-sellout of 2022 chip supply before the year even started, but investors and analysts are concerned the end of the party is already within sight.
While demand remains strong, the semiconductor industry faces a high bar in terms of stock performance after a boom in prices during the COVID-19 pandemic, which led to a surge in demand for cars, electronics and other products that need chips. Chip makers have moved to increase manufacturing of chips, but that has sparked concerns that the rush to build supply may overshoot demand, which happened in the boom-then-bust year of 2018 and is making analysts somewhat cautious going into 2022, despite reporting that the annual chip supply has already been claimed.
Since the pandemic caused demand for chips to surge, silicon-wafer fabricators have been rushing to build out their manufacturing capacity. For instance, Intel Corp. /zigman2/quotes/203649727/composite INTC +3.06% said in October it expected to spend $25 billion to $28 billion to build out its capacity in 2022, up from $20 billion in 2021, then announced on Friday plans to spend more than $20 billion in Ohio to start building out what it claims will be the “one of the largest semiconductor manufacturing sites in the world” at a total investment of $100 billion over the next decade.
That build-out, however, was criticized by analysts last earnings report as they expressed concern that Intel’s aggressive capital expenditure plan would hurt profit margins , and the stock dropped nearly 12% the next trading day.
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Bernstein analyst Stacy Rasgon outlines the debate among analysts on whether the chip sector is now in its “peak cycle” or whether it is “stronger for longer.” While “demand remains off the charts” because of shortages and “company sentiment is among the most positive we have ever heard,” Rasgon said he’s “a touch nervous for what 2022 might hold.”
“For example, auto semis are overshipping normal content trends by over 40% at the moment, and some end markets that showed substantial overship (PC notebook CPUs for example) are beginning to show correction,” Rasgon said.
“For all the talk of lean channels, distributors appear to be actively building substantial inventories,” Rasgon said. “And there has been incremental talk of supply chains, while still tight, beginning to show signs of normalization, normally a signal of a turn.”
For a glimpse of what may be in store, ASML Holding NV /zigman2/quotes/210293876/composite ASML +4.99% recently reported what Evercore ISI analyst C.J. Muse called a “very mixed” quarter with a revenue forecast of a 20% or more gain in 2022, but along with some revenue recognition issues in the first quarter and higher-than-expected operating expenses.
Still Muse said that “issues in the Q are transitory in our view, and demand continues to well outpace supply for ASML – supporting the view that 2022 is DONE and that backlog is building for 2023.”
Speaking of 2022 being “done,” the big reason silicon-wafer fabricators are building out their capacity is that they still have monthslong waiting lists for chip makers seeking to meet demand.
Recently, third-party fab Taiwan Semiconductor Manufacturing Co. /zigman2/quotes/204359850/composite TSM +3.22% in its most recent earnings report , doubled down from last year on how much it was going to spend in 2022 on fab capacity, budgeting $40 billion to $44 billion.
Samsung Electronics Co. /zigman2/quotes/209800866/delayed KR:005930 +0.30% shied away from providing an outlook for 2021 in October but said it had spent 30 trillion won, or about $26 billion at the exchange rate at the time, nine months into 2021 on building out capacity for semiconductor customers. That follows Samsung’s pledge in August to spend up to $205 billion in capital expenditures over the next three years. Samsung is scheduled to report earnings on Jan. 27.
Fear that the surge in semiconductor demand could end in the near future is the main reason why chip companies’ outlooks for the first quarter and year this earnings season will be crucial for setting expectations. Citi Research analyst Christopher Danley expects outlooks will keep rising, but expressed some caution that the chip “upturn is in the late innings.”
“We expect consensus estimates to go up again during 4Q21 earnings season, driven by healthy end demand, extended lead times and higher pricing,” Danley said. “We are seeing the higher pricing flowing through the supply chain, and we believe it will continue to drive the next leg up.”
More optimistic is Cowen analyst Matthew Ramsay who said he expects “solid and broad” fourth-quarter beats and upside to margins and profitability because of high demand from auto makers, industrial customers, mobile device customers, as well as from gaming and PC customers.