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

Source: McAlinden Research   01/15/2022

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, writes McAlinden Research Partners.

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)

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.

To receive all of MRP’s insights in your inbox Monday–Friday, follow this link for a free 30-day trial. This content was delivered to McAlinden Research Partners clients on January 6.

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 electrical vehicle (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 U.S. 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 U.S. semiconductor manufacturing technology and equipment. New developments in this standstill, such as the U.S. 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.

Originally published January 6, 2022.

McAlinden Research Partners (MRP) provides independent investment strategy research to investors worldwide. The firm’s mission is to identify alpha-generating investment themes early in their unfolding and bring them to its clients’ attention. MRP’s research process reflects founder Joe McAlinden’s 50 years of experience on Wall Street. The methodologies he developed as chief investment officer of Morgan Stanley Investment Management, where he oversaw more than $400 billion in assets, provide the foundation for the strategy research MRP now brings to hedge funds, pension funds, sovereign wealth funds and other asset managers around the globe.

Disclosures:

1) McAlinden Research Partners disclosures are below.
2) The following companies mentioned in this article are billboard sponsors of Streetwise Reports: None. Click here for important disclosures about sponsor fees. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
4) This article does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer. This article is not a solicitation for investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company mentioned on Streetwise Reports.
5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the decision to publish an article until three business days after the publication of the article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases.

McAlinden Research Partners:
This report has been prepared solely for informational purposes and is not an offer to buy/sell/endorse or a solicitation of an offer to buy/sell/endorse Interests or any other security or instrument or to participate in any trading or investment strategy. No representation or warranty (express or implied) is made or can be given with respect to the sequence, accuracy, completeness, or timeliness of the information in this Report. Unless otherwise noted, all information is sourced from public data.
McAlinden Research Partners is a division of Catalpa Capital Advisors, LLC (CCA), a Registered Investment Advisor. References to specific securities, asset classes and financial markets discussed herein are for illustrative purposes only and should not be interpreted as recommendations to purchase or sell such securities. CCA, MRP, employees and direct affiliates of the firm may or may not own any of the securities mentioned in the report at the time of publication.

Charts and graphs provided by McAlinden Research Partners.