Semiconductor Shortage Boost the Price of the Semiconductor companies?

Every day since 2021, we have been hearing the news report that we are facing a very serious chip shortage. However, when we look at the PHLX Semiconductor Index, the index that tracks the semiconductor manufacturers, all you see is their stocks price going down. Their earning reported quite well, and they are expanding. Doesn’t the demand drive the price? In a normal sense, those companies’ stock prices should go up, right? Well,  we are going to take a deep look at that.

The Demand Drives The Price?

The first thing I am going to break is your common sense. First of all, you need to imagine, when the pandemic started in March, everyone could hardly get their hands on masks. 3M came out and said they will increase the manufacturing rate. Shortly after, they also announced that they will not add the price for retail.

The shortage would make the price become more expensive, but it won’t benefit the manufacturers. Not because they don’t want to, but because on the inside, those manufacturers have already signed a contract with other corporate buyers, stating the agreed price of the chips. On the outside, those manufacturers would say due to the company’s ethics and image, they would raise the price of the chip, they would take advantage of the shortage, and earn more money.

However, why is every CPU and GPU, even SSD becoming more expensive? Although the manufacturers don’t increase the price, it doesn’t mean the retail store won’t increase the price and the chip shortage is just a perfect reason for them to make some more money.

When Everyone Talks About It, It Becomes A New Norm

If everyone is talking about the same thing, then it becomes the new normal. For the news, it is old news that would no longer surprise the investors. Sometimes, when news becomes a household topic, the news isn’t news, but simply something that has to be said out loud everyday until no one pays attention to it anymore. That is called priced in. The price already reflects the news, even they said the shortage would continue until the next few years, it won’t surprise the investors.

When we compare the Nasdaq and the PHLX Semiconductor Index, the PHLX Semiconductor Index is clearly outperform the Nasdaq.

Nasdaq and Philadelphia Semiconductor Index SOX
Nasdaq and Philadelphia Semiconductor Index SOX

The beginning of the rise was the time that no one knew about the chip shortage. Until only recently, everyone seems to be talking about it, so the news is already priced in.

The Production

When we look at the production index and the worldwide sales index, there is clearly a drop in production rate. There are two possible reasons to explain the situation.

Producer Price Index by Industry: Semiconductor and Other Electronic Component Manufacturing
Producer Price Index by Industry: Semiconductor and Other Electronic Component Manufacturing (PCU3344133441)

Semiconductors Worldwide Sales
Semiconductors Worldwide Sales

1. As we can see the worldwide sales is expectedly going up. However, when we see the production index, the production rate is dropping. That clearly shows the trend of higher demand than supply.

2. When we see the worldwide sales, it peaked at the end of 2020, and it slightly dropped, but the production rate has increased since then.

That is how the media try to fool us, by giving us the information that they want to believe. However, the bottom line is semiconductor storage will probably continue until 2023. Every time the semiconductor companies like Micron (MU), Samsung, SK Hynix, TSMC drop, we would consider buying some. It won’t rise like a rocket escaping from gravity, it will just slowly go up.

The equipment

You might ask, how about instead of buying the manufacturers’ chip, why not buy the company which makes the tools for building chips? That is a very good investment mindset, ASML is the company that you are looking for. However, before you decide to buy it, you should first understand few things.

TSM ASML
From semiwiki.com

ASML edge is the state-of-the-art extreme ultraviolet lithography (EUV) machine. Nikon and Canon once made these machines, but they are already out of the market. It sound so good, they dominated the market. However, there’s always going to be a ‘but’. The EUV machine is only used for very advanced microchips, the normal chips for cars, even rockets, won’t require the EUV machine. Therefore, the rise of ASML is basically based on TSMC.

One day, or perhaps, someday, the US of A would say in the name of national security, they want their own TSMC. Intel would be the candidate.

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