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Daily Intelligence Briefing

Thursday, January 6, 2022

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The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Semiconductor Sales Forecast Third Straight Year of Growth on Tight Supplies, Global Digital Transformation

Summary: After semiconductor sales shattered records in 2021 amid an ongoing supply shortage, chip manufacturers are forecasting another year of growth in 2022. An overwhelming digital transformation is expected to ramp up this year across multiple industries, which is could subsequently bring over half a trillion dollars to the semiconductor industry.

Tight chip supplies are unlikely to subside before the second half of 2022, and in some cases not until 2023. Demand, meanwhile, could continue to boom until 2025 as the transportation sector undergoes an electric transition and technology spending, while expected to slow this year, remains historically high. While certain risks remain for the chip industry, semiconductor manufacturers are confident 2022 could bring a third straight year of record-breaking revenues.

Related ETF: iShares Semiconductor ETF (SOXX)

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Semiconductor Sales End 2021 on a High Note, Look Toward Further Growth in 2022

As the global semiconductor shortage enters its third year, chip manufacturers are projected to shatter both annual revenue records as well as units shipped in 2021. Manufacturers have been ramping up production over the last year, yet sky high demand for semiconductors has still kept supplies tight, a trend that could continue through the new year and into 2023.

According to Evertiq, global semiconductor sales were up 23.5% YoY in November to a total of $49.7 billion, 1.5% greater than the previous month. The Semiconductor Industry Association (SIA) stated the cumulative annual total of semiconductors sold through November was 1.05 trillion, the industry’s highest ever total with a month of data yet to be recorded.

In terms of dollar sales, semiconductors grew 26% in 2021 to an astounding $553 billion worldwide as chipmakers struggled to match the level of unprecedented demand from the COVID-19 pandemic, CNBC writes.

Not only was 2021 a banner year for the industry, but a new report from trade credit insurer Euler Hermes forecasts 2022 to be even more lucrative for chipmakers. Semiconductor sales are expected to grow another 9% this year and cross the $600 billion mark for the first time ever. The firm credits “unusually strong demand” for consumer electronics, higher prices for chips amid tight supplies and an improved product mix as the main reasons for the semiconductor industry’s multi-year outperformance.

Historically, the semiconductor industry tends to have a cyclical nature to it, in which demand for chips surges and manufacturers scramble to build up inventories, eventually leading to a supply glut and a subsequent sales crash.

Bloomberg recently reported on this cycle, noting that the chipmakers have the opportunity to break the trend and post a third straight year of sales increases for the first time in decades. Companies like Intel and Micron have argued the nature of the industry is fundamentally different now due to the fact chips are used in so many products these days rather than just computers and mobile devices.

Since much of the global economy is dependent on these chips, semiconductors could remain increasingly hard to come by up until 2023. 

Supplies Remain Tight as Automakers, Video Game Manufactures Struggle with Production


Chip supplies have been extraordinary tight over the last year and a half due to a slew of factors ranging from strong electronic demand, global supply chain struggles and a high concentration of production coming from two companies in East Asia – Taiwan’s TSMC and South Korea’s Samsung.

Further, new production cannot come online swiftly, as The Wall Steet Journal notes chip factories can take three years to build and begin operations.

A recent report from Deloitte, highlighted by CEPro, predicts that the semiconductor shortage will last well into the new year and could push component lead times into 2023. However, the consulting firm said it expects the deficit to be less severe than the last two years, with the industry projected to balance out by early 2023.

Still, delivery times for chips have yet to reverse their uptrend. Per Global Times, the wait time for semiconductors to be delivered stands at 25.8 weeks in December, six days higher than November and the longest delivery timespan since Susquehanna Financial Group began tracing the data in 2017.

As MRP highlighted a few months prior, a quick economic turnaround from the COVID-19 pandemic has limited chip supplies for industries including automakers and video game manufacturers, creating significant production setbacks. Those setbacks have yet to be resolved and are expected to spill over into the new year.

According to Bloomberg, carmakers sold 12.5 million new vehicles in December, down 23% from the same month in 2020. December is typically a strong month for the auto industry as holiday promotions typically fuel a year-end push, yet low inventories hampered sales for some of the industry’s top manufacturers.

General Motors has been hit the hardest, recently usurped by Toyota as the United States’ top-selling automaker, while consultancy Roland Berger warned some automakers should prepare to battle the chip crisis for years to come.

Video game manufacturers, meanwhile, saw their sales dip 10% in November, primarily due to supply setbacks attributed to the chip deficit. Hardware sales, which are the most correlated to semiconductor supply, dipped 38% according to the most recent NPD Group report. However, console demand has not significantly waned, video game production is just unable to keep up with relentless consumer appetite for gaming consoles.

Demand Boom Could Last Until 2025, Yet Certain Risks Remain

Semiconductor demand is not expected to subside any time soon, either. According to Bloomberg, the current demand boom could last until 2025, driven by strong growth in smartphone and computer sales as well as the expansion of the EV market. Further, semiconductor use has spread from just computers and phones to smart watches and smart home technology, even finding use in clothing and other wearables.

However, there are still certain risks that could derail a third straight year of sales growth for the world’s top semiconductor manufacturers. For one, some analysts expect demand for hardware like TVs and computers to slow in 2022 as markets could be set to normalize after the last two years of breakout growth.

Second, the ongoing “standstill” between the US and China in the battle for tech supremacy, as CNBC writes, could dampen growth with restrictions still in place for Chinese companies looking to acquire US semiconductor manufacturing technology and equipment. New developments in this standstill, such as the US forbidding semiconductor technology specialists from selling to Chinese companies, could also limit expansion.

Finally, with semiconductor production highly concentrated in Asia, a higher likelihood that a typically unusual climatic event, such as drought or typhoons, strike the region could certainly diminish production. Chipmakers already use vast amounts of water, as Fortune has reported, and the growing threat of drought could potentially limit output.

While these risks are certainly possible, the semiconductor industry appears confident 2022 could bring another year of outperformance. Demand for technology was supposed to normalize in 2021 as the economy reopened and remote work subsided, yet that has not been the case thus far. Similarly, chipmakers battled historic droughts last year and were still able to reach record high sales and shipments.


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