- According to JP Morgan’s Gokul Hariharan, the global chip shortage could extend through 2022 – but the situation could improve from mid-year as more supplies become available.
- Ongoing supply shortages for the chips have hurt production in many industries, from cars to consumer devices, personal computers and smartphones.
- Hariharan named two trends that JP Morgan is “really positive for over the next three to five years.”
A top semiconductor analyst at JPMorgan told Businesshala that global chip shortages are set to drag on until 2022 — but the situation could improve from mid-year as more supplies become available.
The US investment bank is advising investors to chase longer-term trends in the semiconductor space — in areas such as high-end computing globally as well as less-advanced technologies in China.
Ongoing supply shortages for the chips have hurt production in many industries, from cars to consumer devices, personal computers and smartphones.
Some analysts and investors expect this shortfall to last through 2023, but JPMorgan is less bearish.
Gokul Hariharan, co-head of Asia-Pacific technology, media and telecommunications research at JPMorgan, told Businesshala on Wednesday: “We’re not expecting a supply crunch in 2023 — so, that’s probably the first thing we can say. Huh.”
But 2022 is “a little more difficult,” he said. Hariharan explained that things could improve in the second half of the year as more supplies come online, but the first six months could still see a shortfall across the industry.
“Capacity is coming online not only from foundry companies, but also from companies [integrated device manufacturer] companies. All US and European IDMs are also expanding their capacity – much of it is expected to be online by the middle of next year.”
Foundries are companies that are contracted by semiconductor firms to make chips. On the other hand, IDMs are companies that design, manufacture and sell those chips.
Hariharan told Businesshala that JPMorgan is recommending that investors begin chasing long-term trends in the semiconductor space that are more structural than cyclical.
Structural trends are long-term, permanent changes in an industry whereas cyclical trends are influenced by the business cycle and usually return to the initial starting point after a few years.
There are two trends that the investment bank is “really positive for over the next three to five years,” he said.
According to Hariharan, the first is the very high-end compute segment. Globally there is disruption in high-end computing, which used to be very monolithic but is now fragmenting as more companies enter the space.
For example, tech giants like Apple, Amazon, Meta (formerly Facebook), Tesla and Baidu are all established chip makers and are bringing some aspects of chip development in-house.
“There’s a lot of fragmentation going on in that space – and it’s certainly headed for rapid growth,” Hariharan said. “So that’s a place, I think, we’re expecting it to grow double digits — 15% to 20% over the next three to five years.”
The second trend JPMorgan is positive on Chinese semiconductor companies that focus on legacy, long tail technologies. These companies manufacture less advanced chips in areas such as power management, microcontrollers, sensors, and other consumer-related areas.
“We are seeing more and more companies coming to China that aim to target some of these long-tail technologies,” Hariharan said.
“Local demand is clearly there. Most of these companies may only have 5% to 10% of local demand at the moment. So the potential addressable market is probably 5 to 10″ [times] What are they serving at present,” he said.
Asia’s top semiconductor firm by revenue Financial data provider Refinitiv has posted double-digit annual profit growth in recent quarters, according to Eikon.
There is an attractive proposition for chip manufacturing companies amid global supply crunch.
For example, Taiwan Semiconductor Manufacturing Company is allegedly raising prices Up to 10% for advanced chips, while less advanced chips – typically used by automakers – will cost 20% more. TSMC is the world’s largest contract manufacturer for semiconductor chips.
But his luck in the stock market has been mixed.
While the likes of TSMC, MediaTek, UMC and Renesas Electronics are up between 16% and 45% so far this year, shares of Samsung Electronics – the world’s largest chip maker by revenue – and SK Hynix are down 13% and 6%, respectively. Huh. in the same period.
Hariharan explained that memory chips are a large component of Asia’s semiconductor industry and memory prices have been coming down since early October.
“The market is anticipating a slight downside in that area, so it’s kind of going through a downward cycle,” he said. “The other part, I would say, is that when the cycle is going to peak, the market is also a little worried.”
Samsung and SK Hynix are both memory chipmakers.
Hariharan explained that investors are generally unwilling to pay if they are concerned about whether a company may beat earnings expectations in future quarters.
He added that JPMorgan expects a relatively small decline in the memory cycle as industry dynamics have improved compared to previous downcycles that lasted longer.