This article was originally published on Opto – Invest in the Next Big Idea.
Foxconn is a major contractor for Apple in the production of iPhones, so any problem in its electronic supply chain is also a problem for the iPhone maker. Foxconn chairman Liu Young-Way said he expects shortages to continue until 2022, although he caveated that by saying it should only affect 10% of customer orders.
“The pandemic and the materials shortage could impact our performance going forward. That’s why we are being cautious,” Liu said.
Apple’s share price could be susceptible to any issue in iPhone production. In Apple’s most recent quarterly numbers, iPhone sales topped analyst expectations, coming in at $65.6bn, up 17% year-on-year and well ahead of the $59.8bn analysts had expected.
Driving demand was the iPhone 12, Apple’s first 5G smartphone. Expectations are that Apple — and the smartphone industry in general — is entering a super cycle as customers look to upgrade their 4G handsets for the latest generation.
Is Apple’s share price an opportunity?
Apple’s share price is down circa 7% this year, primarily due to the wider tech selloff, although the threat to iPhone production is not helping. Still, the volatility in the stock could be a buying opportunity. Among the analysts, the stock has a $152.70 price target, which would see a 21.3% increase on Apple’s share price as of 5 April’s close. UBS analyst David Vogt also upgraded Apple from neutral to buy on 31 March, citing rumours that the tech giant was entering the automobile market. Vogt put a $142 price target on the stock.
What are the wider implications of the semiconductor shortage?
According to Market Watch, analysts believe that the worldwide chip shortage is expected to last until next year. While mobile chip demand was expected to increase this year, PC chip demand was not. Increased demand for electronic goods due to COVID-19, manufacturing problems and the US-China trade war have all been exacerbating the supply problems.
What is happening with semiconductor stocks?
The shortage in chips doesn’t seem to be hurting the semiconductor industry — in fact the opposite is true. Such scarcity has seen the PHLX Semiconductor Index climb circa 18% since the start of the year. J.P. Morgan analyst Harlan Sur noted that the recent earnings season was the first one in which all semiconductor manufacturers “not only beat estimates for the quarter but topped expectations for forecasts.”
“We believe semi companies are shipping 10% to 30% BELOW current demand levels and it will take at least 3-4 quarters for supply to catch up with demand and then another 1-2 quarters for inventories at customers/distribution channels to be replenished back to normal levels,” Sur wrote in an investor note, according to Market Watch on 22 February.
Chipmakers appear confident that they can meet increased demand. Taiwan Semiconductor Manufacturing [2330.TW] which makes silicon for Apple and others, is planning to spend $28bn increasing facilities in 2028. Intel [INTC] has stepped up its chip making ambitions with a $20bn multi-year plan to build two semiconductor factories in Arizona.
Apple’s share price managed to rally following David Vogt’s recommendation, indicating that the market has already factored in the semiconductor shortage’s impact.
Where next for the semiconductor investment theme?
The semiconductor investment theme is currently the second-top performer over the month on our thematic screener, gaining circa 14%. Over the past year, the investment theme is up 106.73% at time of writing, while 4 out of the 5 underlying ETFs have seen more than 13% in gains this past month.
The iShares PHLX Semiconductor ETF [SOXX] and the Invesco Dynamic Semiconductors ETF [PSI], two of the best-performing ETFs on our screener, both count Texas Instrument [TXN], Qualcomm [QCOM] and Broadcom [AVGO] in their top 10 holdings. Texas Instrument’s share price has seen a 21.40% gain YTD, while Broadcom’s share price has gained 14.88% (as of 5 April’s close).
Qualcomm’s share price hasn’t been so lucky, falling almost 5.50% in the same timeframe. However, this could be a buying opportunity for investors. The company has strong fundamentals and is one of the primary chip suppliers for 5G phones. Should chip demands be met, Qualcomm’s share price could see a turnaround.
Nvidia [NVDA] is another chipmaker that has seen a slip in its share price. While the stock is down 12.25% over the past month, Wall Street is expecting the graphics chipmaker’s revenue to grow 33% in 2022 (as of 5 April’s close). It also carries an average $643.88 price target, according to Yahoo Finance. Hitting this would see a decent 15.1% upside on the current price (as of 5 April’s close).
Scarcity in chips is likely to continue the demand for the semiconductor investment theme. However, chipmakers will have to take care not to overcompensate for the lack of supply. A glut of chips coming onto the market could have the inverse effect and send share prices down. Nvidia’s experience ramping up chipsets in an effort to cash in on bitcoin mining a few years ago may serve as a cautionary tale here.
For Apple, the impact will be seen in its next set of earnings updates, especially in iPhone sales. Should these still show growth, Apple’s share price could hold firm.
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The investment universe is changing beyond all recognition, and with a thematic focus, investors can capitalise on this wholesale disruption. From Genomics to Artificial Intelligence, disruptive innovation empowers companies to displace industry incumbents, and secure majority market share. Opto exists to identify those businesses, and help investors to invest in the next big idea.