Better Buy: Chipmakers or Automakers?

It's long been known that chipmakers and automakers are cyclical industries. However, recent shortages of the processors used by automakers offer investors some insight into which of these industries gives investors a better opportunity to profit in the months and years to come.

On this clip from Motley Fool Live recorded on Feb. 10, "The Wrap" host Jason Hall, Fool analyst Nick Sciple, and Fool.com contributor Danny Vena examine the opportunity and what investors should be looking for.

Jason Hall: This is something that is just snowballed. This global semiconductor shortage. It's turned into a serious problem for the auto industry. We've been hearing about it from the semiconductor folks since late last year. But General Motors (GM -0.07%) has joined essentially every other major automaker, in describing the implications. In their earnings report, the company is saying that profits could take a $1.5 billion to $2 billion haircut in 2021, because of the problems with supply.

They've already shuttered at least one of their manufacturing facilities, and it's a plant that I think makes crossovers and SUVs. So these are high-margin vehicles. It's closed until March. It's closed for another almost month.

Here's a question. I don't want to talk about [laughs] General Motors here, but let's do some prognostication. Nick, I'm going to let you go first on this wild guess that you're probably going to be wrong about. Which is a better investment over the next decade, automakers or chipmakers?

Nick Sciple: I think the answer for me here is very simple. If you look back over the past 10 years or so in the auto industry, one of the big things as you notice is there's overcapacity in the market.

Tesla (TSLA 0.64%), how they got their very first factory out in Fremont, California was a factory that I believe was a Toyota (TM -4.43%) joint venture factory that they had no use for and Tesla purchased that.

If you look globally, Europe, every continent around the world, there's a surplus of factories for automotive. You might say that these are ICE (internal combustion engine) factories, what have you. In any event, in the automotive industry, there's a surplus of factories.

In the chip-making industry, as we're seeing evidence by what's going on with GM and lots of other automakers not having enough chips out there, and then this massive growth in cloud computing and AI, and all these things, there was an under-supply in manufacturing facilities for chipmakers.

And so for that very simple reason, and that there is an under-supply of the facilities to meet demand for chips in the world, and there is an oversupply for facilities to meet demand for auto production, I think the chipmakers because there's a shortage, they're the ones that are going to outperform over these next five years.

Jason Hall: Danny Vena, weigh in here.

Danny Vena: [laughs] My answer is, it depends.

When you ask questions broadly like that, in the auto industry you've got old guard and you've got an upstarts, like Tesla. I think what you're going to find is that it's going to depend on the company.

Like NVIDIA (NVDA 1.68%). In the chipmaker space, NVIDIA is just really the top dog and it's growing like a weed. If you want to go individually, I'd say Tesla is probably going to outgrow many of the other automakers. NVIDIA is going to outgrow many of the other chipmakers, because of where its focus is. It's focusing on artificial intelligence, it's focusing on data centers, it's focusing on cloud computing.

I think that what you're going to see is you're going to have to pick the companies out of each industry that you think are going to accelerate over the next decade.

Now, just broadly, I have a hard time with that, because generally speaking, I don't like chipmakers or automakers.

Jason Hall: [laughs]

Danny Vena: I really don't.

Jason Hall: Well the bottom line is we're talking about two industries that are both very cyclical and have high fixed costs. So they can go from boom to bust very quickly. I'm so glad you said that.

Nick Sciple: Very cyclical. Big time. There's new innovations every year. I think maybe historically technology has driven the bus maybe a little bit more historically on the chip side, but we're seeing autos become much more these tech-evolved devices. Maybe autos are more competing on the tech side now here going forward. I think both of these industries aren't going to go away. Like 20 years from now, I think autos and chips are going to be incredibly important into the future.

Jason Hall: I think if you take the entire sectors. Guys, tell me if this is maybe a good way to think about it. I think that the semiconductor industry is going to be a less-worse industry to have invested in, whatever the end result. Because even the bad, mediocre businesses in the chip space are going to be in high demand. Yes, they're cyclical, but it's going up [laughs]. The need for microprocessors across society are going to be broad and deep and continue to increase.

I don't want to say automakers is zero-sum, but it certainly doesn't have the kind of growth, even with the middle-class growing around the world, it just doesn't have the same percentages of growth, and I think there's also a ton of crazy high valuation and speculation that's baked into the total market cap. You think about some of these pre-revenue companies in the automaker business that are worth tens of billions of dollars that we truly don't know if they're going to exist in a decade.

Danny Vena: Holy NIO (NIO -2.29%) Batman, what now?

Jason Hall: [laughs] I think NIO is going to exist, but it's another thing for a lot of these other ones that aren't really making anything. But the flip side of that too, I look at the GMs and I look at the Ford's (F -1.47%) and their cheap valuations, these companies are still going to exist in a decade. I don't care what anybody seems to think, and they're going to be selling a ton of EVs. But is that going to be enough to lift all of the dead weight? I don't think so. I'm going to say semiconductors.

Nick Sciple: There's a substitute on the auto side. You're looking at replacement demand because a lot of people have something that's good enough. You already have a gas car. There's a push to change over, but it's still replacement demand where I think there's still new demand growth on the chip side of the industry.

But I think the big question on Ford and GM is what happens to the truck business? Because if we look at, I think for the numbers off the top of my head, it's 70% of their profits from the truck business and GM it's 50% of their profits are from the truck business.

Tesla says they're going to start delivering the Cybertruck at end of 2021. If that starts taking meaningful share away from these companies, then maybe we worry about what happens to them from a profitability point of view, but until those parts of the business really start withering away, the profit base of the company is still intact.

Jason Hall: Well, I'm going to say I'd probably going to start to flame war here. So don't "at" me on Twitter people, but the Cybertruck is not a threat to Ford. It's not a threat to the F-150 because...

Nick Sciple: You said it, not me.

Jason Hall: Fleets are not going to buy Cybertrucks because there's a lot of fundamental functional reasons why the Cybertruck is not going to be at Rivian, maybe. I mean, there are other pickup truck makers that could be a threat, but there's a lot of fleet owners and the fleets are what drives the profits and the revenue. Because they keep the factories going and they cover all of the fixed costs and they're going to wait for a Ford. There's just a lot of them who are going to wait for Ford, they're going to wait for GM. That's the reality there. That doesn't mean that everybody else can't be successful, but it's not going to undermine Ford's truck business.

Nick Sciple: Sorry, it's going to be fun to because the Cybertruck should come to market at the same time as the electric F-150. I think Ford says they're going to start production in 2022 and Elon [Musk] says they, maybe they'll get a few produced in 2021, but they'll have meaningful production in 2022 is the timeline we're on.

So we're going to see Tesla introducing their new truck or the same time as these traditional folks introduced their truck. It's going to be very exciting to see. There is so much exciting stuff to watch and like electric vehicles and autonomy and all this stuff over the next several years. It's just like a slug fight after slug fight after slug fight with each year with these new releases. So lots to watch, lots to bit as you do, let's see what happens.

Jason Hall: It is. Danny, any last thoughts on this?

Danny Vena: Last thoughts. Send your opposing opinions to @apparentlyleft on Twitter.

Jason Hall: [laughs] Move away here it comes.