From drought to glut? – Where to position yourself in the chip value chain?

From drought to glut?

Where to position yourself in the chip value chain
We believe 2022 will be a much more difficult year for investing in semiconductors than 2021’s high tide that lifted almost all boats. Given the issues with supply that should be resolved in the next few months, more pandemic lockdowns and an economic slowdown in China, stock picking is key in the semiconductor sector. We believe automotive electric vehicles (EVs) and autonomous driving (ADAS) related specialists are best positioned, as well as semiconductor material specialists.

Record 2021 sales, 2022 looks up as well

The worldwide semiconductor market is expected to exceed the $500bn mark for the first time in 2021, with year-on-year growth of 17–27%, according to sector organisations. Momentum is positive, as market estimates continue to creep up. Sector specialists forecast the semiconductor market to grow by 7.3% on average in 2022. Taking the FY22 sales estimates of the top 25 selling global semiconductor companies, analysts are forecasting 12.1% growth. However, given recent concerns about the Chinese economy casting a shadow over, for instance, new car and smartphone sales, this could prove too optimistic. China is a very important end-market for chips and this could affect growth expectations. Also, the new Omicron variant could pose a threat to semiconductor sales estimates.

Supply chain issues and policymakers

COVID-19 has carved deep tracks into the supply chains of many sectors. Severe shortages of semiconductors have emerged and are affecting production capacity, not only for cars, but also for smartphones, TVs and graphic cards to name a few. The supply chain issues are expected to be resolved in 2022 and we tend to agree with that scenario, although we believe it will probably be earlier rather than later in the year, as inventories seem to be returning to normal levels. Supranational policymakers, including from the US, Europe, China and Japan, were concerned about the shortages and reacted with plans to add capacity in their regions. This could very well lead to a situation of overcapacity within a few years.

Best positioned

We believe that the combination of policymakers interfering with current semiconductor supply chains by adding capacity, chip shortages coming to an end and economic pressures (eg from China or pandemic flare-ups) mean a selective approach to semiconductor investing is key in the coming year. This situation is the opposite to this year’s share price increases, with the valuation multiples of many companies now at historically high levels. In Europe, we see chipmakers geared towards ADAS and EVs, and their supply chains, better positioned in the next year, as well as companies with a product portfolio that is still in very short supply.

Selected European sector plays

  • ADAS and EV chip manufacturers: X-Fab, Kalray and
  • Opto-electronic companies: ams, Dialog.
  • High-end substrate (equipment) suppliers: IQE, Riber and Soitec.
  • Equipment makers: ASMI, ASML, Besi, Aixtron and Suss MicroTec.

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