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Is the Semiconductor Shortage Almost Over?

By Rachel Warren, Travis Hoium, and Connor Allen – Dec 17, 2021 at 12:45PM

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Things are looking up, but the situation is complicated.

The chip shortage has been one of the most widely discussed angles of the ongoing supply chain crisis. This shortage has impacted a host of industries, from tech to automobile manufacturing. In this segment of Backstage Pass, recorded on Nov. 17, Fool contributors Rachel Warren, Connor Allen, and Travis Hoium discuss the shortage, stocks to buy in this space, and more. 

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Rachel Warren: Morgan Stanley released a note this past Monday stating that the semiconductor chip shortage for the auto industry was essentially a thing of the past. The report noted that Malaysian fabrication plants are operating at a 100% capacity again. This news is also in line with what some CEOs of major automakers have been saying lately.

This is great news. But there seems to be a lot of mixed consensus out there about whether the broader semiconductor shortage is going to be transitory or whether it's going to be staying with us for a long time. I'm curious what you guys think.

Is this shortage going anywhere or is this something you think we'll be grappling with for a long time? In that vein, is there a stock to buy in this industry that you think is in a strong position to weather these shortages. Connor, why don't you take this one first.

Connor Allen: I used to be on team transitory with inflation in general, and I hopped off that train a couple of weeks ago. I don't think that's going to last or I don't think it is going to be transitory and I think this inflation is something that's going to continue. I understand how specifically with semiconductors there could be a bottleneck that's broken. Now there is the supply that they need and the prices could go back down.

I do understand that. But I think there's also something to consider that consumer's spending is absolutely bonkers right now. Companies have learned that consumers will pay these inflated prices for their products. Will they bring the prices back down? I don't know. Maybe demand requires that they do that, but that's yet to be seen and I'm going to stay on team inflation for the time being. 

But as far as a stock that I like, based on this news, I mean, there's a lot of them, but obviously one that a lot of people think about when they hear the word semiconductor is Nvidia (NVDA -1.51%). I think it's an obvious choice. As far as GPU, which geographic processors go, they are just years ahead of everybody else.

Their GPUs are absolutely phenomenal. As we've talking a lot about in the news lately with the metaverse and AI, Nvidia is great for all of those things. Especially the metaverse, it could be a huge market opening for Nvidia to hop in on. They create the most powerful GPU out there.

I think that they could definitely benefit from this. As far as Nvidia goes, another reason that I like, here's just a couple of reasons, that they've seen 50% to 100% growth in revenue and free cash flow for the past six to seven years.

Also there's been some estimates that the semiconductor industry is expected to grow at 9% CAGR for the next seven years. I believe personally that Nvidia is going to grow a lot faster than that 9%.

Rachel Warren: Wow. That's awesome. What about you Travis do you have a slightly different take on this, I think. [laughs]

Travis Hoium: Well, I'll take the transitory side of the inflation argument. I think the auto industry is one place to look at this. Auto prices have gone crazy especially in the used car market in large part because of this chip shortage.

If the chip shortage does ease over time and keep in mind the supply chain, the chip producers have known about these shortages for six to nine months now, this is maybe a new story for people buying used cars. But the supply side of it, I think it's going to be figured out faster than we think and I wouldn't be surprised if we overshoot on the supply side, eventually. Now that may be six months away.

But I think it's in sight and when we start to see reports like this, I think that's a really positive sign for industries like the car industry. If we get back to a place where supply is a little bit more in line with demand or as things like electric vehicles start to hit the market and you have new suppliers in the EV industry, you may actually have more supply than you need from the auto industry and we may see prices come down.

The argument would be that the high prices that we're seeing in the auto industry specifically is a short-term thing as this semiconductor shortage is worked through. If we're on the back end of that, then we'd start to get some more of a supply neutral environment, then we should see prices come down a little bit.

The stock that I think will benefit, and this is an either case, is Apple (AAPL 0.83%), Apple's first-in-line for chips. They pay for that, with Taiwan Semiconductor specifically. But they are going to be the company that if there's a chip shortage, they're going to be better off than their competition.

If we see this chip shortage ease then they are just going to have more supply to meet the demand for customers. I think there's a win on both sides for them, it's maybe not quite as big upside as a company like Nvidia. But I think that's a good stock to be in, no matter what the supply environment is like, just because they paid to be in the front of the line.

Rachel Warren: I love both of those companies and I think it's interesting that we're seeing such improvement in the auto sector specifically. 

Connor Allen owns Apple, Nvidia, and Taiwan Semiconductor Manufacturing. Rachel Warren owns Apple. Travis Hoium owns Apple. The Motley Fool owns and recommends Apple, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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