The global semiconductor shortage has disrupted many industries over the past year. Technical challenges in manufacturing new chips, tight industry bottlenecks, pandemic-related disruptions, pandemic-induced demand for consumer electronics, and the secular growth of new markets -- including 5G, AI, connected cars, and the Internet of Things -- have all sparked the crisis.
Intel (NASDAQ:INTC) CEO Pat Gelsinger recently predicted the chip shortage would continue for a "couple of years," while Forrester analyst Glenn O'Donnell believes it could last through 2023. Those gloomy forecasts are alarming, but should investors be concerned?
Which industries will be affected?
Investors in certain companies should consider the chip shortage to be a near-term headwind. Automakers, which have already suffered severe disruptions throughout the pandemic, could struggle to recover as the chip shortage throttles their production of newer and more advanced vehicles.
During Ford's (NYSE:F) latest conference call, CEO Jim Farley admitted the "semiconductor shortage and the impact to production will get worse before it gets better." But on the bright side, General Motors CFO Paul Jacobson told investors that the "short-term semiconductor headwind" would not impact its "long-term earnings power."
Many consumer electronics companies, including Apple (NASDAQ:AAPL), Sony, and Nintendo, also face chip shortage challenges. Apple expects the shortage to throttle its Mac and iPad sales, while Sony and Nintendo expect the crisis to reduce their supplies of PS5 and Switch consoles, respectively.
Meanwhile, data center customers, 5G network operators, cryptocurrency miners, and industrial IoT companies are gobbling up more chips and exacerbating the shortage.
That pressure could generate headwinds for companies like Nokia (NYSE:NOK), which needs to expand its 5G networks to keep growing. Nokia CEO Pekka Lundmark recently said the company was "getting prepared for the upcoming component shortage," and noted the issue still "deserves constant attention."
Those warnings seem bleak, but investors in chip-starved industries should only be worried if they plan to hold their shares for a short time. Investors who plan to hold their shares for several years shouldn't be worried as long as the underlying demand for the companies' products remains healthy.
Pay attention to the industry bottlenecks
However, the chip shortage has also highlighted the industry's overwhelming dependence on TSMC (NYSE:TSM) and Samsung, the world's most advanced contract chipmakers.
TSMC remains ahead of Samsung in the "process race" to create smaller and more powerful chips, and it currently serves a long list of fabless chipmakers like AMD, NVIDIA, Qualcomm, and Apple.
But TSMC's existing plants can't handle the current demand for new chips, so it recently announced it would spend $100 billion to expand its operations over the next three years. Samsung is also boosting its capex, and Intel recently launched its third-party foundry business to address the chip shortage.
These moves indicate a spending war between the top foundries is imminent, so investors in TSMC, Intel, and Samsung (which isn't listed on U.S. exchanges) should expect a lot of pressure on their margins over the next few years -- even if their home countries support their businesses with fresh subsidies.
Simply put, I believe investors in these industry bottlenecks could face longer-term challenges than the companies that are actually fueling that demand.
Spot the potential winners
The global semiconductor shortage is often considered a headwind, but it can also generate tailwinds for certain companies. Semiconductor equipment makers like ASML and Applied Materials will profit from the rising capex at chip foundries since they supply the machines that manufacture the chips.
Chipmakers that manufacture their own chips, such as Skyworks Solutions and Texas Instruments, should also generate more stable growth than their fabless peers. However, these IDMs (integrated device manufacturers) could still be affected by the slower production of products that require fabless chips.
That being said, there are still a lot of companies that consider the chip shortage to either be a strong tailwind or fairly inconsequential to their near-term growth.
The key takeaways
The semiconductor shortage can be bad, neutral, or good news depending on the stocks you're holding and your investment time horizon. This isn't a black-and-white issue, and it requires a much deeper dive into the affected companies.