Last week, semiconductor equipment bellwether ASML Holding (ASML 1.68%) reported earnings. Although the company beat profit expectations, revenue fell short. Yet the stock fared better than most in the technology space last week, because ASML's revenue was affected by its inability to supply the overwhelming demand it's seeing -- a much better problem than a lack of demand, for sure.
Unfortunately for those who want the current semiconductor shortage to end as soon as possible, ASML CEO Peter Wennink's comments seemed to indicate the current chip crunch could last quite awhile still.
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Can't make enough fast enough
For the fourth quarter, ASML reported nearly 5 billion euros in revenue, up 17.2% over the prior-year quarter. Given that we are still in a huge chip shortage and companies across the world are scrambling to increase supply, and given that ASML has a monopoly on some on key technology, one might have thought revenue would have been higher.
During the investor presentation, Wennink said fourth-quarter revenue would have been 300 million euros higher had it not been for a new policy meant to speed up deliveries. After the policy change, ASML is now shipping machines to customers before it runs its qualification test. Only after ASML qualifies a machine does it recognize revenue, so that is now happening later. As such, about 300 million Euros were deferred from the fourth quarter to the first quarter. And since ASML is continuing the practice, a whopping 2 billion euros are expected to be deferred into the second quarter from Q1. So even though it's faster shipment, it's slower revenue recognition.
Even counting those added dollars, Wennink said ASML's capacity to ship machines is still about 40% below current demand. So even though the company expects 20% revenue growth and 25% shipment growth this year due to the timing issue, ASML's numbers are still well below where they could be.
Here's this circular problem that could prolong the chip shortage
Another interesting takeaway from the call is that ASML, like so many of its peers, is itself having a difficult time locating needed chips in order to make machines. In fact, ASML said it has developed a "scarcity center" team that collates all its scarce materials, and if the company can't get a part through a distributor, it is now calling the manufacturer directly. "I don't think the situation has gotten any better. It's just that we have gotten better at managing it," Wennink said.
And herein lies the big problem. If semiconductor equipment companies that run on processors, microcontrollers, and analog chips can't get the equipment they need, they can't produce enough machines to make more chips. That chicken-and-egg problem could mean the chip shortage will drag on.
Thus, it's no wonder Intel CEO Pat Gelsinger recently reiterated his stance that the chip shortage will continue into 2023.
What to do?
How should investors react to this shortage? Certainly, one could invest in semiconductor equipment stocks such as ASML. Those companies should be in for strong growth, but may report revenue that initially disappoints, due to their inability to meet demand. That being said, those sales will likely only be deferred, not lost. So this current growth cycle could last another couple of years.
Additionally, chips with pricing power, or those subject to inflation, are likely to do well. These include memory producers, which are price-takers, as well as companies with best-in-class proprietary designs that may be able to raise prices, such as Nvidia.
On the other hand, companies that use lots of the chips that are in short supply, such as automakers, may not be able to produce enough goods. Again, if a carmaker has pricing power, it may be able to raise prices to make up for it. But if it doesn't, that carmaker could struggle this year.
When looking across your portfolio, ask yourself if each company would benefit or suffer due to the shortage of needed chips. It could make all the difference for your portfolio performance in 2022, and perhaps 2023 as well.
