By Wallace Witkowski
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.
Chip-related companies reported strong first-quarter results and outlooks — a record for some, like Nvidia Corp. /zigman2/quotes/200467500/composite NVDA -0.44% and Advanced Micro Devices Inc. /zigman2/quotes/208144392/composite AMD +0.59% — and most analysts still see the semiconductor shortage lasting into next year . But there has been some movement at the extremes in recent weeks.
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. /zigman2/quotes/202934861/composite AAPL -0.16% 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. /zigman2/quotes/205710729/composite MU +1.10% 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.
Micron’s earnings report roughly marks the end of one earnings season for U.S. chip-related stocks, with Intel Corp. /zigman2/quotes/203649727/composite INTC -0.53% and Texas Instruments Inc. /zigman2/quotes/202237907/composite TXN -0.34% 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. /zigman2/quotes/201631938/composite ADI -0.50% , Netherlands-based NXP Semiconductors NV /zigman2/quotes/202999625/composite NXPI +0.32% , Germany’s Infineon Technologies AG /zigman2/quotes/203152288/delayed XE:IFX -1.09% , South Korea’s Samsung Electronics Co. /zigman2/quotes/209800866/delayed KR:005930 +1.05% , and Japan’s Renesas Electronics Corp. /zigman2/quotes/203872935/delayed JP:6723 +2.38% . 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.”