The slowdown in demand for semiconductor chips will rebound as the industry has been impacted by the global pandemic, supply chain woes and fears of a recession.
Both the supply chain disruptions and chip shortage have put the semiconductor industry under scrutiny, but growth will return for chip makers long-term.
“Despite the recent macro and geopolitical concerns that have resulted in the near-term demand slowdown, we believe the long-term semiconductor industry growth is still intact as driven by the increasing silicon content within end-devices,” wrote Bruce Lu, an equity analyst at Goldman Sachs.
Exponential demand rose during the past two years, especially of wafer chips that “suddenly became the key manufacturing bottleneck across industries and sectors,” he wrote.
The lack of inventory has spurred the semiconductor industry to either “aggressively” obtain more wafer capacities and “building more safety inventory levels in response to the global crunch,” Lu said.
The semiconductor industry is in the midst of a long-term secular bull market where there will be cyclical downturns over the next decade, Angelo Zino, an equity analyst at CFRA, a New York-based investment research company, told TheStreet.
The industry will experience 5% to 7% annualized long-term growth because of the need for more silicon content due to the rise in the popularity of electric vehicles and data centers, he said.
But investors will have to be patient because 2023 will be a painful and “down year” for the industry, Zino said.
Increasing Silicon Content in EVs, Devices
Automotive and data centers will drive the semiconductor market because there will be higher silicon content per vehicle and device, he said.
“The industry is going to be largely driven by content growth in IoT,” Zino said.
The companies that are the most exposed to the amount of silicon content include Nvidia (NVDA), Advanced Micro Devices (AMD), OnSemi (ON), NXP Semiconductors (NXPI), and Marvell Technology (MRVL), he said. While Marvell, AM, and Nvidia concentrate on providing chips for data centers, OnSemi and NXPI are more focused on the automotive industry,
“Nvidia has a huge play on cars and can make systems for autonomous vehicles, which will make the company a big opportunity for investors,” Zino said.
Although semiconductor content growth in the smartphone market benefited from the shift to 5G and consumers moving to buying higher priced, more durable devices, the market peaked on a unit basis in 2016, he said. PCs and tablets benefited from a rush of orders during the pandemic that was unsustainable and now needs to find a more normalized run rate
The industry is currently in the “early innings” in manufacturing chips for EVs and data centers, Zino said.
“We have a long ways to go, “ he said. “There will be a lot more faster and smarter artificial intelligence chips coming to the market in data centers.”
While stocks for semiconductors have fallen by 45% to 50%, the industry will “start to bottom out” during the next two to three quarters, Zino said.
“The question is how ugly will it get and no one knows,” he said. “Earnings estimates are coming down and are not low enough.”
Long-term investors will become more “aggressive” as the valuations of those stocks fall, Zino said.
“I am pretty confident that things will reach an extreme point in the first half of next year and we will see better conditions thereafter, but nobody knows when and investors have to slowly scale back in,” he said.
Impact of the CHIPS Act
The defensive move by the U.S. government in passing the $280 billion CHIPS Act will be a gain for American chip manufacturers, Zino said.
“The initiatives from the U.S. will give US chipmakers a three to four year lead avatangage,” he said.
The law includes $53 billion of funding and 25% tax credits available for companies during the next five years for American and foreign companies investing in semiconductor manufacturing facilities and equipment in the U.S.
Asia manufactures 7% to 80% of global chip manufacturing, mainly in Taiwan, South Korea, China, and Japan.
“Over the last two weeks within the industry, one of our biggest fears is coming to fruition and the U.S. is looking to expand restrictions on Chinese companies and getting more aggressive on restricting the sale of equipment into China,” Zino said. “Long-term that bodes pretty well for a lot of chipmakers - the U.S. government trying to protect U.S. chipmakers from a massive expansion in China and looking to prevent China from poaching the smartest people that we have.”
The CHIPS Act will help further diversify the industry into western markets and away from China, even though the country is “still going to be an important story,” he said.
