The semiconductor industry has enjoyed outsized demand throughout the pandemic as home-bound individuals demanded more high-tech gadgets than ever.
Semiconductor chips unexpectedly became a household topic during the pandemic after the industry was rocked by supply shock when it faced unprecedented demand as students and workers went remote. This was compounded by factory closures, hangups at the port, and other broader-industry letdowns.
While the initial shock saw semiconductor companies face lower profit margins, profits began to surge in 2021 as demand for semiconductors continued to outpace production. This created a rosy outlook for the chipmakers as forecasts were for more of the same.
However, following earnings reports and the potential progression of the CHIPS Act, the industry seems poised for a shake-up.
The CHIPS Act is a slimmed-down version of a larger set of legislation aimed at reducing America's dependence on Taiwan and China for semiconductors. The bill, to be voted on Tuesday, would authorize more than $50 billion in subsidies.
The chipmaking business is dominated by China and Taiwan. Taiwan Semiconductor Manufacturing Company (TSM) is the largest player in the industry by far, controlling 54% market share. Meanwhile, over the past four quarters, nineteen of the twenty fastest-growing semiconductor companies in the world hailed from China.
While the CHIPS act is a plus for the industry, it disproportionately benefits some players, while leaving others high and dry. This is because subsidies will be provided for the development of factories. The bill aimed at boosting US competitiveness in the industry does not exclude foreign companies from receiving funding from it, so long as the factories built are on U.S . soil.
Intel (INTC), Texas Instruments (TXN), and Micron Technologies (MU) would be major benefaciaries of the bill as they all design and manufacture their own chips. Meanwhile, NVIDIA (NVDA), Qualcomm (QCOM), and AMD (AMD) would all be left out as they design, but don’t manufacture chips.
Intel, Taiwan Semi, and others currently have planned U.S. projects contingent on government money.
While new factories will bolster future semiconductor manufacturing capacity, they will do little for the here and now.
Taiwan Semiconductor’s most recent earnings report highlighted the road ahead for the industry, as it struck a mixed tone despite the raised sales outlook.
Taiwan Semi said that it will slash spending on expansion by as much as 9%, which reflects concerns over long-term demand in the face of a potential recession. PC and smartphone demand is expected to stay strong for the remainder of this year but could start to struggle in 2023.
Comments by CEO C.C. Wei pointed to an easing in demand during the first two quarters of 2023 as consumers enter an inventory correction, which is a period of decreased demand that comes with lower sales and margins.
Currently, demand for semiconductors exceeds supply, and Wei expects “capacity to remain tight throughout 2022.” However, as demand reaches the inflection point where demand no longer exceeds capacity, margins and guidance should fall as well.
Long-term investors in chipmakers should be excited about the potential CHIPS Act on a sooner-the-better basis, while short-term investors should watch out for individual reports during this earnings season as their pricing advantage seems poised to wane.