Chips and Dips – The Market Impact of a Semiconductor Shortage

Actions have consequences. In a year when everyone expected a shift to clean energy, the semi-conductor industry has provided what may become the final nail in the coffin for the internal combustion engine. Chip shortages are seriously impacting the auto industry.

Tesla, the EV king, has been manufacturing its own chips in Texas since 2019, but chip companies like Qualcomm (QCOM), which supplies traditional auto manufacturers, are struggling to make demand. They blame industry reliance on a “handful of players” in Asia.

Let me be the first to say it. Covid-19 shut down Asian manufacturing long before the pandemic arrived on our shores. Didn’t anyone see this coming? The demand for chips, which stretches from automobile computers to mobile devices, was always going to be there.

The Dips: Industries Affected by Chip Shortages

The fallout is significant. General Motors (GM) closed three North American plants last month and Ford Motor Company (F) is looking at a 20% drop in production. Both stocks are at a 12-month peak right now, so it’s a good time to sell. Don’t expect them to climb.

All in, the chip shortage is expected to cost automakers roughly $61 billion in sales this year. That’s nothing compared to the electronics industry. Apple (AAPL), Microsoft (MSFT), Nintendo (NTDOF), and Sony (SNE) are all looking at major losses in their mobile and gaming divisions.

On a macro scale, cuts by the manufacturers trickle down into the retail space. I expect to see a dip in BestBuy (BBY), which has a heavy reliance on chip-based electronics like mobile phones and smart TVs. Walmart (WMT) and Target (TGT) may be affected also.

There are some big names on this list, many of which investors have become reliant on to bring stability to their portfolios. If you look at each of them today, there’s no indication that we’ll see a downtrend this year, but believe me, it will happen.

Manufacturing Shortfalls Lead to Job Losses

Not to be the harbinger of doom, but an inability to make cars due to chip shortages means fewer employees are needed in automotive factories. That reasoning carries over to electronics manufacturers and retailers. Take the chips away and jobs disappear.

As we learned painfully last year, the (BLS) monthly jobs report affects market behavior, so the impact of this situation won’t be limited to companies that manufacture semi-conductor chips or those that rely on them. By the end of Q2, it will be across the board.

Fortunately, events and situations that drive down share prices aren’t necessarily a bad thing for investors. Covid-19 has been a horrific global killer that’s had a huge economic impact around the world, but it’s also made a few savvy traders very wealthy.

Opportunity Knocks when Sales Begin to Fall

Chance favors the prepared mind. Every serious investor I’ve met has a story that starts with, “I wish I saw that in the beginning.” For my father’s generation, it was Ford and MacDonald’s. For my peers, it was Apple and Microsoft. All were big earners they failed to see at the right time.

Personally, I’m dumping retail and automotive stock, with the exception of Tesla (TSLA). I’ll likely shift dollars from the tech stocks into Bitcoin (BTC), then buy them back when the chip shortages start to affect the stock prices. That should hedge me against losses.

I’m betting on Intel (INTC) to emerge as the big gainer in the semi-conductor space in 2021. With US-China trade relations still in flux, electronics manufacturers will need domestic help to meet demand for semi-conductor chips. Intel is in the best position to accommodate them.

To solidify my US positions in this space, I’m also buying the Invesco Dynamic Semiconductors ETF (PSI). It tracks the thirty best US companies in the space and is up 72% over the past twelve months. At the very least, I expect them to hold that value this year.

AI Investments Are Not in Jeopardy

I’m still bullish on AI applications and the companies that support them. Micron Technology, Inc (MU) is a good example. They are US-based and manufacture high-performance memory solutions for self-driving cars. They also make the LPDDR5 memory chip for 5G devices.

My final, and favorite, recommendation in this space is the ARK Autonomous Technology and Robotics ETF (ARKQ). Aside from Bitcoin, it was my biggest earner in 2020, with a twelve-month gain of over 140%. Chips or no chips, I expect it to keep growing.

Contractions are followed by expansions. The semi-conductor industry and those who rely on it will take a hit this year. The economic impact of that will be significant. Opportunities for investors will be plentiful. Watch for the contraction and make sure you buy at the right time.

The opinions expressed in this article are the writer’s own and do not constitute financial advice in any way whatsoever. None of the content or data published by Investors Prism constitutes an investment recommendation, nor should it be relied upon for investment activities. Investors Prism strongly recommends that you perform your own independent research and/or speak with a qualified investment professional before making any financial decisions.  See our full disclaimer at https://investorsprism.com/disclaimer/

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About the Author

Chips and Dips – The Market Impact of a Semiconductor Shortage

Kevin Flynn

Kevin D. Flynn is a former financial professional and founder of AdvisorScale Financial Writing. He lives in Leominster, Massachusetts with his wife Evelyn, two cats, and nine wonderful grandchildren.