For well over a year now, the big story in tech stocks has been the persistent global semiconductor shortage, and how it's been messing up supply chains for everyone from PC makers to smartphone manufacturers to car companies. But did you know the semiconductor shortage is also causing problems within the semiconductor industry itself?
It's true -- and the problem may even be self-perpetuating.
On the one hand, chipmakers such as Taiwan Semiconductor (TSMC), Nvidia, and AMD are enjoying strong demand and pricing power. Their sales were up 36%, 53%, and 71%, respectively, last quarter. On the other hand, semiconductor equipment manufacturer Applied Materials (AMAT 0.72%) -- which sells TSMC the equipment it uses to contract-manufacture computer chips for Nvidia and AMD -- just missed earnings on Thursday and blamed "on-going supply chain issues" for its miss.
The trouble with computer chips
Not all the news is bad. For its fiscal second quarter, which ended May 1, Applied Materials grew sales 12% year over year to $6.25 billion and expanded its operating profit margin on those sales to 30.3%. As a result, it grew its bottom line GAAP profits by 22% to $1.74 per share. (Non-GAAP profits were a bit higher at $1.85 per share.)
On the other hand, though, both sales and profits fell short of consensus expectations. Analysts had anticipated $1.90 per share in earnings, for example. The reason for this, explained management, was that even though "demand for Applied Materials' products and services has never been stronger," it cannot build semiconductor manufacturing tools as fast as it would like to. In turn, the slowdown is due to shortages of "parts that go into the subsystems of our tools" and "silicon components" -- i.e., computer chips!
Yes, you read that right. A lack of computer chips is making it hard for Applied Materials to build the machines that are needed to make computer chips. It's a negative feedback loop.
Now, this isn't a new problem for Applied Materials. Reviewing its past filings with the SEC, it cited these same "supply chain challenges" in fiscal Q1 2022 and fiscal Q4 2021 before that. And this means that, despite being aware of the problem for more than six months now, Applied Materials still hasn't been able to get its supply chain concerns fixed. What's more, the company is not expecting to be able to get them fixed soon.
In its new guidance for fiscal Q3, management said sales will remain flat sequentially at $6.25 billion "plus or minus $400 million." And management's non-GAAP guidance range for the quarter foresees profits of only $1.77 per share at the midpoint, a 4% decline from Q2.
That's bad news for Applied Materials' shareholders, as the new guidance implies another sales and earnings miss in Q3.
It also means Applied Materials won't be building all the chip-making machines its customers would like to buy -- and that means we can all expect the global semiconductor shortage to keep dragging on a while longer.