Semiconductor: The chip supply chain is getting harder to trade



It’s getting complicated for investors in semiconductor stocks, with last year’s big chip shortage morphing into an inventory glut for some companies, and others getting caught up in geopolitics.
The Covid-19 pandemic spurred an unprecedented supply crunch, shutting down semiconductor factories while also fueling demand for consumer electronics. Now, some chipmakers are warning of cooling demand for parts used in and smartphones, while carmakers continue to wrestle with a shortfall of certain chips.
Another fly in the ointment is renewed tensions between the US and China over the Asian nation’s burgeoning semiconductor industry, with equipment giant ASML Holding NV caught in the middle.

“Supply constraints are not being felt equally,” said Angelo Zino, senior equity analyst at CFRA Research. “The biggest customers are getting priority (Apple, data center players) while more fragmented industries that are not as relevant to the chip industry (industrials, autos) are being pushed to the backburner.”
The complicated supply situation, higher interest rates and possible recession have all contributed to a chip-stock slump this year. A 37% rout for the Philadelphia Semiconductor Index, or SOX, has wiped out about $1.4 trillion in market value.
Here’s a breakdown of the sector’s supply quandary:
Smartphones, Tablets, Computers Consumer electronics look most vulnerable to an oversupply issue, with Micron Technology Inc. cautioning last week of slowing demand for memory chips used in computers and smartphones. The company will cut spending on new plants and equipment to slow output.
Still, Samsung Electronics Co.’s better-than-expected jump in quarterly revenue is a good sign for consumer demand and sparked a rally for beaten-down Asian chipmakers. All eyes will be on computer processor giant Intel Corp. when it reports later this month. Intel has slumped 28% this year, while Micron is down 38%.
Production of chips used in premium and mid-tier 5G devices has also outstripped demand, according to Counterpoint Research. Most of these smartphone chipsets, like application processors, system-on-chip chipsets and basebands are made by Qualcomm Inc., Apple Inc., MediaTek Inc. and Samsung. Qualcomm is down 31% this year and MediaTek has tumbled 47%.
Auto Chips
Chips used in autos are still recovering from Covid-driven shortages. General Motors Co. said it expects second-quarter results to take a hit due to issues with certain components. Things may be looking up, however, with chip delivery times falling by a day in June.
The bulk of chips used in car production come from NXP Semiconductors NV, Infineon Technologies AG, Renesas Electronics Corp., Texas Instruments Inc. and STMicroelectronics NV. These stocks as down between 16% and 45% this year.
“Cars are becoming data centers on wheels, and electric vehicles use four times as many chips as regular cars,” said John Barr, portfolio manager at Needham Investment Management. “The auto industry is still short parts, and I think that with growth in EVs, you’ll continue to see strong growth here.”
Data Centers, AI
Demand for high-powered processors used in data centers has been more resilient than smartphone and tablet chips so far, but is still fragile.
“We don’t know how stable enterprise demand is for data center, or what auto/industrial chip demand looks like,” said Jordan Klein, a managing director and tech analyst at Mizuho Securities. “Those have been strong, and while they could be holding up better, there’s a risk we could see order cuts or demand soften.”
Nvidia Corp., Advanced Micro Devices Inc., Micron and Intel all make data-center chips. Nvidia and AMD have both fallen nearly 50% this year, erasing a combined $409 billion off their market value.
Graphics processing units (GPUs) for artificial intelligence may hold up better than other areas, according to Needham’s Barr. Meta Platforms Inc. will still require five times as many GPUs for its AI initiatives, despite broader headwinds faced by the company. “The general trend of more AI demand and usage is going to go unabated,” Barr said.
Chip Equipment Makers
Crucial for all chipmakers is the complex equipment they rely on. That area has gotten harder to navigate this week, after Bloomberg News reported that the US is pushing the Netherlands to ban ASML from selling some of its tools to China. Shares of the Dutch semiconductor-equipment maker have declined 39% this year.
While analysts generally agreed that a complete stop on ASML exporting all deep ultraviolet lithography systems to China is unlikely, geopolitics “can easily scare investors,” said Degroof analyst Michael Roeg.
Any ban or escalation of tensions could also hurt peers such as Applied Materials Inc., which derives 25-30% of its sales from China, Bloomberg Intelligence said, while a protracted battle between Washington and Beijing over equipment could further disrupt shaky supply chains.
The next catalyst for the industry is earnings season, where investors will be watching for clues on supply and demand challenges.
Tech Chart of the Day
Asia’s battered chip shares got a reprieve on Thursday after Samsung’s beat sparked hopes that the sector’s rout may have been overdone. A Bloomberg gauge of the group jumped 3.5%, the most in nearly four months, with Samsung and Taiwan Semiconductor Manufacturing Co. contributing the most toward the gain. US peers also rose pre-market.