Semiconductor chips appear to have already sold out for 2022, yet the share prices of key players like Samsung [005930.KS] and Nvidia [NVDA] don’t reflect the euphoria. Signs of overbuying, late-cycle fears and a multiyear stock rally are concerns for the long-term trajectory of these shares.
Big names in the semiconductor industry have seen their share prices hit in 2022 so far, with Nvidia and Samsung down 16.7% and 4.2% year-to-date, respectively, as of 17 February.
The sector had a good run in 2021, thanks to price hikes and a shift in the product mix towards higher-end chips. However, with this already factored in, the future may be bleaker as the global shortage of semiconductors is expected to continue and may be impacted by escalating geopolitical tensions between the US and China over Taiwan.
Yet, even as supply rolls in, the path may still be difficult for the semiconductor industry as some of its key customers, including Apple [AAPL] and Amazon [AMZN], have already started to bring certain aspects of chip development in-house.
Samsung scales up
The need to create more sophisticated chips, combined with the spike in demand caused by the pandemic, has put pressure on the semiconductor industry to ramp up investment in new production capacity. This high level of capital expenditure is likely to impact earnings in the upcoming year for many of the leading semiconductor firms.
Samsung, the world’s largest chipmaker, plans to spend $37.7bn in 2022 to expand its semiconductor foundry business, in the hope of addressing the supply shortage and increasing its manufacturing capacity.
Although the company will be banking on these moves paying off in the longer term, it has had a clear impact on the company’s current balance sheet. Samsung revealed last month that it spent 90% of its 2021 annual capital expenditure of 48.2 trillion won ($40.1bn) on its chip business.
The company reported its best fourth-quarter profit in four years, although it warned of ongoing Covid-19 and supply chain challenges and did not issue guidance for 2022.
Samsung’s fourth-quarter operating profit was 13.9 trillion won ($11.6 billion), up 53% from a year ago. Profits from its chip business, the largest division, more than doubled from the year ago quarter to 8.84 trillion won.
Nvidia may be in a better position
Despite the failure of plans to purchase UK-based semiconductor firm Arm from SoftBank, Nvidia is perhaps in a better position than its peers because it does not need to increase capacity. The company has healthy cash reserves and has been working with its suppliers to avoid the semiconductor shortage. It also has a 20-year deal with Arm to source semiconductors.
The graphics processor firm is fabless, meaning that it designs its chips but outsources the manufacturing, which partially safeguards it from the current shortage. Yet, that comes at a price: in the third quarter of 2021 alone, the company paid $1.6bn to secure its supply.
Nvidia’s chips are not only used in gaming, but also fields such as artificial intelligence and the metaverse, which require higher computing power than other functions. The company is banking on its Omniverse Enterprise, a set of software tools that will allow businesses to collaborate in building virtual worlds, to boost its revenue.
Competition heating up
While Samsung and Nvidia are both taking steps to secure supply, their competitors in the semiconductor space are also making moves, and other tech firms are entering the market.
Taiwan Semiconductor Manufacturing Company [TSM], the world’s largest contract chipmaker, announced last year that it plans to invest $100bn over the next three years to expand the production of its cutting-edge silicon wafers, which are used to make a variety of chips. Intel [INTC], meanwhile, recently announced that it is spending $20bn to develop its own chip factories in Ohio, which could increase up to $100bn.
Though setting up a chip factory costs billions and takes several years to build, in the long term it gives the tech giants control and allows them to produce custom-made chips, rather than using the same generic models as their competitors, which is increasingly important as firms such as Apple, Microsoft [MSFT] and Alphabet [GOOGL] turn to custom homemade chips built in-house to deliver better performance.
Chip crunch could continue
It will take time for this new capacity to come online, so the shortage is widely expected to continue into the second half of this year, and some analysts are concerned that the current level of investment will not be enough.
Glenn O’Donnell, research director at Forrester, told CNBCthat “the human race is addicted to technology. Demand will continue to increase, not wane. In fact, I am skeptical that all this investment is actually enough.”
Despite the ongoing disruption, Wall Street analysts are bullish on both Samsung and Nvidia stocks. According to 39 analysts polled by MarketScreener, Nvidia and Samsung both have a consensus ‘buy’ rating.
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