As a result of the global semiconductor shortage, chips enjoyed a heavy demand that far exceeded the available global supply. The demand spikes sparked by the pandemic apparently led to a near sell-out for the 2022 chip supply before the year had even begun; however, investors and analysts seem more concerned that the party might finally be coming to an end.
The semiconductor business is faced with a tough act to beat after demand skyrocketed, causing a boom in prices during the Covid-10 pandemic, which increased the demand for cars, electronics and other products that use the chips. In a bid to meet the heavy demand, chipmakers have greatly increased efforts to produce and supply more chips; however, there is concern that this move might instead backfire if supply eventually surpasses demand. This disaster occurred in the boom-then-bust of 2018 and is causing analysts to re-think the current 2022 scenario, despite reporting that the annual chip supply has already been claimed.
Silicon- wafer fabricators, have been in a rush to increase their manufacturing capacity since the pandemic caused a demand surge for chips. One amongst these is Intel Corp. (ticker: INTC), that reported in October that it expected to spend $25 billion to $28 billion to build out its capacity in 2022, a climb from $20 billion in 2021. The company also announced plans to increase expenditure to more than $20 billion in Ohio to start building “One of the biggest semiconductor manufacturing sites in the world” at a total investment of roughly $100 billion over the next decade.
Ambitious as the plans were, analysts heavily criticized the company’s last earnings report over concerns that Intel’s aggressive capital expenditure strategy would hurt profit margins, and the stock fell nearly 12% the next trading day.
Bernstein analyst Stacy Rasgon commented on the debate among analysts about whether the chip sector is approaching its final days or whether it is “stronger for longer.” While demand remains astoundingly high owing to the shortages and the company still enjoys a solid and positive reputation, Rasgon said he’s “a tough nervous for what 2022 might hold.” For all the talk of lean channels and distributors appear to be actively building substantial inventories,” said Rasgon. “Plus there has been incremental talk of supply chains, while still tight, starting to show signs of normalization, usually a signal of a turn.”
To catch a snapshot of what might lay ahead, ASML Holdings (ticker: ASML) recently reported what Evercore ISI analyst C.J Muse called a very mixed quarter with forecast revenue of a 20% gain or more in 2022. Despite the few revenue recognition issues in the first quarter and higher-than-expected operating expenses.
Still, Muse commented he felt the issues in Q are transitory, and demand continues to well outpace supply, in the case of ASML- further pushing the view that 2022 is done, and there is a backlog for 2023.
More on the fact of 2022 being done, the ostensible reason for silicon-wafer fabricators increasing their capacity is that they currently still have months-long waiting lists for chipmakers seeking to meet demand.
Although Samsung Electronics (ticker: 005930) did not provide an outlook for 2021 in October, it did say it spent 30 trillion won, an equivalent of $26 billion on building out capacity for semiconductor customers, which was in keeping in line with the company’s pledge to spend up to $205 billion in capital expenditures over a three year period.
General fear over the surge in demand and what it could mean for the semiconductor business is the reason chip companies’ outlooks for the first quarter and year this earnings season will be important for setting expectations. Christopher Danley, Citi Research analyst, expects a continued rise in outlooks but expressed some caution that the chip upturn might be in its last days.
Danley said that it was expected for consesus estimates to rise up again during the 4Q21 earnings season, driven primarily by healthy demand, extended lead times and higher pricing.
According to him, there is higher pricing flowing through the supply chain and he believes it will represent the next leg up.