Investment opportunities emerging as supply imbalance eases
Brenda Nicholls of Mackenzie Investments explains how the global computer chip industry got so backed up, and why it matters
- Featuring: Brenda Nicholls
- February 15, 2022 February 15, 2022
- From: Mackenzie Investments
(Runtime: 4:59. Read the audio transcript.)
Following a dramatic tech sell-off earlier this year and a protracted shortage of high-end computer chips, tech sector opportunities are once again presenting themselves to savvy investors, says a portfolio manager with Mackenzie Investments.
Brenda Nicholls, an assistant vice-president with Mackenzie Investments and co-lead manager, along with Martin Rose, of the Mackenzie GLC team’s science and technology fund, said high-performance computing is a secular long-term trend, regardless of short-term supply disruptions.
“The world needs very advanced, powerful, faster, and more efficient semiconductors,” she said. “One of the great opportunities for us right now, is we think company fundamentals are going to matter, even more so, as the speculative excess is curtailed.”
Speaking on the Soundbites podcast this week, Nicholls said semiconductors are the world’s fourth most-traded product, driven by the digitization that is transforming a wide range of industries, including automotive, telecommunications and consumer goods.
The recent shortage stemmed from a number of unrelated incidents: an escalating trade war between the U.S. and China which caused tech companies to stockpile inventory; a winter storm that cut power to a microprocessor plant in Austin, Tex., owned by Samsung Electronics Co. Ltd.; and a fire in Tokyo, Japan that heavily damaged a fabrication plant owned by Renesas Electronics Corporation, provider of about 6% of automotive chips worldwide.
The pandemic also continues to hinder global production while at the same time spurring rising consumer demand for chip-powered products.
Adding to supply chain challenges, automakers slashed their semiconductor orders in March 2020 when economies shut down due to Covid-19, only to reverse those cancellations when orders came roaring back a few months later.
“Once 2021 is fully reported, chip shortages will have wiped out over $200 billion globally for carmakers with production of an estimated 7.7 million vehicles lost or delayed,” Nicholls said. “In fact, research has shown over 169 industries have been touched by the shortage in some way and range from air-conditioning manufacturing and breweries to game consoles and medical devices.”
However, she’s optimistic that supply chain issues will soon be resolved.
“We believe the semiconductor shortages are likely to improve in the second half of this year as the overspending on goods reverts back to more normalized trends,” she said. “There have been numerous mentions of shortages on company conference calls this earnings season, but we get the general sense that we’re getting through the worst of it.”
In aggregate, the period from order to delivery is no longer lengthening, she said. Chip manufacturers are predicting improvements beyond the current quarter. And packaging, testing and assembly plants in Southeast Asia are expected to resume full-time operations as Covid becomes more controlled.
Nicholls said tech companies with strong revenue growth outlook, pricing power and the ability to generate free cash flow will be in favour this year.
She pointed to software names like Intuit Inc. and Adobe Inc. (both based in California). She also likes networking and cloud-computing companies like Arista Networks of Santa Clara, Calif.; Microsoft Corp.; Amazon.com Inc.; and Alphabet Inc.
As for manufacturers of high-end superconductors, she likes Advanced Micro Devices Inc. of Santa Clara, Calif.; Nvidia Corp. of Santa Clara, Calif.; Broadcom Inc. of San Jose, Calif.; and Texas Instruments Inc. of Dallas, Tex.
“There have been a few companies that have seemingly weathered the previous two years stronger than others,” she said. “Texas Instruments comes to mind, as they have traditionally been viewed as an industry barometer, given the breadth of their product portfolio and customer base. They raised inventory in the latter months of 2019 and were rewarded with strong sales growth as the pandemic accelerated demand. They are vertically integrated and manufacture about 60% of their own product, which is positive for their cost structure.”
The supply chain issues of 2021 have sparked discussions of a North American reshoring of chip manufacturing, she said. “However, we’re not entirely convinced that it’s wholly beneficial for the industry,” she said.
The facilities are incredibly complex and expensive, she said, and it will take at least two years before new semiconductors hit the market. Even then, those products are likely to be trailing-edge nodes – a measure of chip complexity — rather than leading-edge ones.
“The risk of an overcapacity build of legacy node production with inherently higher North American cost structures gives us pause,” she said.
“The companies that are able to design the very high-end, high efficiency, customized chips, those are where the real opportunities lie,” she added. “As the use cases of the conductors broaden out, the opportunities for investments broaden out as well.”
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.
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