The Impending Semiconductor Collapse

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We’ll check out shares of ford the company announcing that the chip shortage is now hitting two of its most productive and profitable plans very strong demand being held by held back by the semiconductor shortages yes cook when he thought those chip shortages could ease cook telling me the chip shortages linger on it is unclear cook told me how long it will last it

Is complex one of the biggest stories of the past two years has been the massive semiconductor shortages as people were forced to work from home demand for personal computers and data centers skyrocketed with all these products requiring semiconductors chip suppliers were unable to keep up with demand and prices for second hand nvidia gpus searched the two or three

Times their retail prices on ebay this caused shortages in industries from automobiles to smartphones on the flip side semiconductor producers saw a massive windfall from record high chip prices with jim cramer saying that nvidia could become a 10 trillion dollar company however by the middle of 2022 we’ve seen a complete reversal of fortune with nvidia in just

About every other chip stock losing some if not all of its pandemic era gains with the global economy headed towards recession and work from home demand solidly behind us chip demand is set to fall off a cliff according to gartner global pc shipments have declined by 19.5 in the third quarter of 2022 marking the greatest decline since they started keeping records

25 years ago intel which just last year was announcing tens of billions of dollars in new investments is now laying off thousands of employees as they face rapidly declining revenue while just a few months ago we were facing a historic semiconductor shortage it now looks like we’re on the verge of an equally historic semiconductor gla which could spell disaster for

The once high-flying sector the recent bear market shows the importance of diversification just diversifying into a portfolio of stocks alone clearly hasn’t cut it this year with the s p 500 down 25 year-to-day even including bonds doesn’t provide you much protection as the 60 40 stock bond portfolio is down 20 year-to-date a according to a recent goldman sachs

Report they instead suggest diversifying into alternative assets such as precious metals and fine art which tend to outperform during periods of high inflation according to a recent report by mckinsey institutional investors typically invest 30 to 50 percent of their portfolio into alternative assets the most interesting alternative asset class is contemporary art

Which is outpaced the s p 500 by 131 percent over the past 26 years that’s why we’ve partnered with masterworks they let you invest in masterpieces from the likes of picasso and monet at a fraction of the cost by breaking down ownership into shares when a painting you’ve invested in cells you can see a potential return on that investment they had their most recent

Sale in early october where they delivered a 25.1 percent net annualized return masterworks has had to acquire and release more art on their platform to meet demand and there is a wait list but you can skip it just by clicking the link in the description below and now back to the video to understand what’s going on today we first have to understand the root cause

Of the chip shortage in the first place the most obvious cause was the lockdown orders during the pandemic with people forced to work from home they were no longer able to use their desktop computers in the office tens of millions of people started to work from their home office for the first time and in many cases this necessitated buying a new computer at the

Same time there was a massive increase in video streaming in online gaming as people had more time for in-home entertainment all of this created a massive increase in web traffic which needed to be supported by greater data center capacity what really aggravated the problem was just in time manufacturing semiconductor manufacturers and their customers alike have

Long adopted the idea of holding as little inventory as possible at any given time let’s say you’re a smartphone manufacturer suppose all the semiconductors in your phone cost you fifty dollars to buy your factory produces 100 cell phones per day so you pay five thousand dollars per day and semiconductor costs if you wanted to keep an entire month of inventory on

Hand you would need to invest 150 000 which may be prohibitively expensive for your small factory for large electronics companies like apple the difference between holding one week of semiconductor inventory versus one month could add up to billions of dollars so the dominant business strategy is to keep as little inventory on hand as possible and regularly receive

Weekly or even daily new shipments from the semiconductor manufacturers to feed your assembly line the semiconductor manufacturers themselves have fixed capacity at their factories which are referred to as fabs within the industry these fads are typically massive structures that cost billions of dollars and multiple years to construct so in the short term their

Capacity is largely fixed this lets us apply shortages for everything that requires microchips this includes everything you would expect like personal computers and cell phones but it also include things like automobiles which require chips for their dashboard infotainment systems and finally the last piece of the puzzle for the chip shortage was bitcoin’s bull run

In 2020 and 2021. mainstream institutions like michael saylor’s microstrategy started buying large qualities of bitcoins which pumped up the price and created general hype amongst the crypto community a byproduct of this was a massive increase in demand for computing power for bitcoin mining nvidia gpus were particularly good at bitcoin mining increased demand and

Constrained supply can only beget higher prices at the peak of the bubble in 2021 used nvidia gpus were selling for more than double their launch price on platforms like ebay and amazon while nvidia was perhaps the biggest beneficiary almost all chip design and manufacturing companies saw their revenues explode to the upside at the peak nvidia’s revenue more than

Tripled compared to pre-pandemic levels the taiwanese chip giant tsmc saw revenue double and dram maker micron saw sales rise by nearly 50 percent because their costs are primarily fixed net income growth was even crazier with nvidia’s increasing five-fold unsurprisingly this led to a monster rally in chip stocks but over the past few months they’ve given up almost

All of their pandemic era gains and we’ll get into why why that is the case shortly remember that most manufacturing companies that use computer chips practice just in time manufacturing unable to secure the necessary semiconductors many companies were forced to temporarily halt production for example automobile manufacturers across the world were forced to shut

Down their assembly lines losing out on tens of billions of dollars worth of sales an automobile that retails for forty thousand dollars might only have two or three hundred dollars worth of computer chips in it representing less than one percent of the total cost the small amount of money that you save on inventory management is tiny compared to how much you lose

By not being able to produce your end product these painful losses cause many companies to overhaul their supply chain philosophy abandoning the old just-in-time system they instead started to order as many chips as they could get to make sure they wouldn’t be caught flat-footed in the case of future shortages if you think back to the beginning of the pandemic back

In march of 2020 there is tremendous fear about widespread shortages for all essential items you might remember the internet memes about people hoarding toilet paper as they feared that grocery stores would close the panic buying caused empty shelves at the toilet paper aisles even when there is no disruption for supply and no legitimate reason why people would need

More toilet paper during the pandemic the same hoarding had happen in the semiconductor market companies were so shell-shocked by shortages then when supply finally became available they bought every chip they could get their hands on regardless of the price and regardless of whether or not they actually needed that many so while a lot of the chip boom was the result

Of real demand a lot of it was also driven by hoarding that artificially pumped up prices even more in 2021 politicians started to panic where the biden administration passing 50 billion dollars of subsidies to boost domestic chip manufacturing the european union passed a similar package worth 43 billion euros companies like intel and taiwan semiconductor started

Construction of massive new fabs in arizona and ohio to take advantage of these subsidies according to the industry association semi capital expenditures from chip companies increased by 44 in 2021 to 102 billion dollars for 2022 expenditures are on track to increase further to a record-breaking 118 billion dollars this means that massive new fixed capacity will

Come online over the next couple years just as demand finally starts to slow and with microchips supply shortages can turn into supply gluts faster than just about any other industry one of the most important metrics to watch is a south korea semiconductor producer inventory index as south korea is one of the leading chip manufacturing countries during the chip

Shortage of 2021 it fell by 25 as ships were flying off the shelves faster than they could be produced in 2022 the situation is completely reversed and inventory has increased by more than 50 percent this means that ships are piling up in warehouses with nobody to buy them and we’re already starting to see the beginnings of a collapse whenever there’s a chipped

Glove the first canary in the coal mine are companies like micron which produces dram and nand memory chips memory chips are built to industry standards so memory from different manufacturers are almost interchangeable prices are thus very quick to adjust to shifts in aggregate supply and demand with micron you can clearly see the boom bust cycles when demand is

Low prices skyrocket and their profits explode the memory makers build more capacity to take advantage of the high prices a couple years later the new capacity comes online and prices tank the last boom bust cycle happened between 2016 and 2019. we’re now at the peak of the next cycle and we’re already starting to see prices coming down for cpu and gpu manufacturers

Like tsmc their products are not nearly as commoditized as memory so it’ll take longer before we see their sales plummet but it will happen in the two years prior to the pandemic tsmc saw its revenue grow by seven percent per year in the two and a half years since the pandemic began they’ve seen their revenue grow at an average rate of 20 per year this was clearly

A one-time benefit from the chip shortage as the shortage ends their revenue is likely to decline back towards the trend line the fact that we’re at the beginning of a chip bust is well known by the financial markets with the sox semiconductor etf down by 45 in 2022 far underperforming the s p 500 and even the tech heavy nasdaq 100 the question is does this create

An opportunity you need to pick up shares of semiconductor stocks on the cheap in general it’s best to buy chip stocks during the bust phase of the cycle provided that you’re patient enough to hold until the next boom which could be three or four years away and there are reasons to be bullish on the sector for the long term the consulting firm mckenzie estimates

That the global semiconductor industry will grow at a seven percent annualized rate from now until 2030. if they’re right this means that the market size will almost double by the end of the decade there are a few key growth drivers which will make this happen firstly 5g cellular telephones require more complicated and valuable chips compared to 4g phones as more

Workflows move to the cloud the demand for data center computing power will continue to increase which requires more microchips everything you do online from gaming to video streaming to logging into your company’s remote desktop generates web traffic and greater demand for data center capacity the final growth driver is a shift to autonomous vehicles according

To mckinsey an autonomous electric vehicle will require four thousand dollars of semiconductors each compared to just 5 hundred dollars for a normal car today of course this assumes that fully autonomous vehicles become street legal and widely available within the next decade which is a big question mark this video is not financial advice and i currently have no

Exposure to semiconductor stocks at the time of releasing this video but if you believe that autonomous vehicles and continued digitization is the future the current chip glut may be a once in a generation opportunity to buy shares in cutting-edge semiconductor companies at depressed prices and as these talks continue to fall this proposition is getting more and

More attractive by the day alright guys that wraps it up for this video what do you think about the coming semiconductor glove let us know in the comments section below also don’t forget to sign up for our daily business and finance email newsletter at newsletter as always thank you so much for watching and we’ll see you in the next one

Wall street millennial signing out

Transcribed from video
The Impending Semiconductor Collapse By Wall Street Millennial