What the Semiconductor Shortage Means for Tech Investors

The global semiconductor chip shortage is getting worse, and it might not clear up until late 2022.

In this video from "The Virtual Opportunities Show," recorded on Jan. 25, Fool analyst Asit Sharma and Fool contributors Rachel Warren, Demitri Kalogeropoulos, and Jose Najarro discuss the latest U.S. government report that shows just how little cushion is left in that vital part of the world's supply chain, and they consider what the impact could be during the next year. 

Demitri Kalogeropoulos: The article I saw today in The Wall Street Journal -- the headline is about semiconductor chips, and it says: "Chip Shortage Leaves U.S. Companies Dangerously Low on Semiconductors." We've been talking about this for a little while. It's not a surprise. But we've got some hard numbers and some updated numbers now. We know that there's been an uptick in demand, obviously, for everything related to technology. Also, at the same time, we've had a supply challenge with the pandemic and stuff like that. So that's created this historic shortage in chips.

But we got some updated figures from the government. The Department of Commerce does a survey every now and then in different manufacturing worlds, and this one was in the semiconductor space, asking U.S. companies to estimate what their inventory is in these important, critical things. The companies came back and they said five days. Basically, the result of this survey was that most U.S. companies have about five days of inventory of these chips, which, if it sounds low, it really is a very low number. That's basically no stockpiles of these things in inventory.

The article describes that in a normal year -- in 2019, let's say -- companies would have something like 40 days of this inventory in stock, so very tiny. The article quotes Commerce Secretary Gina Raimondo (hope I'm saying that right) saying the semiconductor supply chain is "very fragile" right now.

You might've heard there's a big move politically to get spending in this arena, to bring more semiconductor manufacturing into the U.S. from Asia and China and Taiwan. Just this week, Intel made a big splashy release, talking about the $20 billion that they plan to spend adding new factories, I think it's in a couple of cities in Ohio, just to bring that manufacturing there. But we know that that kind of thing, that's going to take years to build up domestic production. So that's interesting.

I just think now that we're getting into the heat of earnings season, I'm sure we're going to hear a lot of companies... It might surprise you in terms of what impact this can have all up and down in different industries. We know the automobile industry is the obvious one that shows up, but there's everything -- all kinds of consumer technology. So I think we're going to hear a lot of companies describe shortages.

The other thing is that it's an interesting risk to just be aware of in the tech world, because according to this, if one factory closes in Taiwan for a week or two, that could have huge ramifications. We're going to be operating under that wafer-thin inventory for probably at least until the second half of the year. Just interesting to keep an eye on that.

Rachel Warren: When I heard the whole "five days' store of chips," I was like: "Wait, five days, is that correct? This can't be real." And, is this a combination of not being able to replenish that minimum store that they would always keep on hand, in addition to maybe having to dip into that store to deal with the ongoing demands that there are? I feel like this is something that's going to be staying with us for awhile.

We know that companies are able to deal with this various ways. Some have more control over their supply chain than others. Some companies have been making major acquisitions and partnerships to try to close the gap on their supply chain, so to speak.

Yeah, I think this is something to be aware of, and we know that we've seen a lot of volatility in stocks that operate in this space. It's not just one singular factor that is the solution to ending these problems. I think it's something we're going to be dealing with, at least for many months.

That example of "one place shuts down and the whole world is impacted" -- I remember, many months ago, there was a key port, I believe, in China, that handles something like 70% of the world's commerce, and it shut down because of one COVID case. So that brought all these different elements to a screeching halt. I think when you think about how interconnected we are in this global economy, it definitely breaks it down and makes it easier to understand why this is happening.

But I'm curious to see what some of these companies, on their earnings calls, how they're going to address this, because it's like the elephant in the room. [laughs] It's not going anywhere. Yeah, just my initial thoughts.

Jose Najarro: There was a company -- ASML Holding (ASML -2.25%) -- that reported earnings last week. For those not familiar with ASML, this is a company that creates equipment that is used during the manufacturing process of semiconductors. One thing that they mentioned in their earnings call might be a little bit scary. They said that normally, since they create equipment to make sure quality assurance and everything goes well, after the equipment is created, they spend an extra four to eight weeks testing the equipment, making sure it works properly before sending it out to their customers.

Their customers being the manufacturers like TSM [Taiwan Semiconductor Manufacturing], like Intel, Samsung, some of the biggest manufacturers. And they're saying, "Hey, right now, we're willing to risk not doing these quality-assurance tests because we want this equipment four to six weeks earlier." Obviously, they probably still have some small tests that they're doing in the back end, but it's no longer to the depth it's usually done.

It's scary how it shows how much the semiconductor industry is in high demand right now. It's also scary: If one of these equipments ends up going bad, that itself can cause some further defects across the line.

Asit Sharma: By the way, Rachel, Jose gave the signal when you started talking because he had his mic on before you.

Rachel Warren: I'm so sorry.

Asit Sharma: I hope I followed his protocol. But the thing that came to my mind was the vulnerability of some consumer-facing companies in the coming year if these shortages persist, which they will. We already saw this hit Best Buy's (BBY -2.19%) earnings. Really fun company to follow: well run, high return on capital. They figured out the retail game, as hard as that is. But I see maybe some further rough waters for them ahead. They, in particular, and companies like them, could be vulnerable to these chip shortages, because these chips aren't just going in automobiles and big, heavy electronic equipment. They're going into small consumer goods as well. That's something to watch. I would be a buyer of Best Buy at some point this year -- I think Demitri may still own some shares, if I'm not mistaken. You still have your shares, Demitri?

Demitri Kalogeropoulos: I've never bought Best Buy. I talk about that a lot, there -- I am impressed with their business, for sure.

Asit Sharma: For some reason, I thought you were a shareholder at some point. But yeah, that's something that I would be looking for this year if they got hit by the chip shortage, maybe to go in and scoop up some shares. The other thing -- something that Rachel said triggered a memory of an article I read this morning that the World Bank is revising downward slightly its growth estimates for the world next year, including the U.S. and China.

The U.S. in part, this is one of the factors -- the chip shortage affecting us as it is the rest of the world. China, in particular, because of their zero-tolerance policy for COVID. That port that you talked about that was shut down with one COVID case, that is taking a toll on their economic growth.