From humble beginnings, the silicon chip has gone further and done more than any other technology in connecting the world and influencing our everyday lives.
Semiconductors are everywhere. They are the brains behind the smartphones in our pockets. The tiny transistors also power the CPUs in our laptops. The silicon chips are the core components in data centers. In short, semiconductors are the basic building blocks of anything electronics. Everything and everyone uses semiconductor chips in one form or the other.
The advances in semiconductors have also impacted broad industries within health care, communications, transportation, clean energy, defense, manufacturing, computing, among others. Innovations in semiconductors have created new technologies such as 5G networking, artificial intelligence, quantum computing, cloud computing, and e-commerce.
There is currently a shortage of chips, and this trend has steadily worsened since last year. Although production may soon be returning to normal, a new surge in demand fueled by the pandemic has caused a supply shock to the semiconductor industry, triggering an unprecedented global shortage and bottlenecks.
The world is short of computer chips. So, what does this all mean for investors?
The most complex and expensive of silicon chips today are logic chips. These components give any computer, smartphone, and consumer electronics their smarts or intelligence. Qualcomm (QCOM), Nvidia (NVDA), and Apple (AAPL) are some of the biggest consumers of logic chips. Most of these technology companies are "fabless" companies. They do not operate their fabrication plants.
Except for AAPL, these companies only design their logic chips. Manufacturing of these chips occurs at advanced factories called foundries, which produce and manufacture the final products. There are currently four large foundries that account for the bulk of the global chip fabrication – Taiwan Semiconductor Mfg. (TSM), Samsung, GlobalFoundries Inc., and United Microelectronics Corp. (UMC).
Companies from Taiwan and South Korea dominate the foundry business. TSM is the undisputed leader in producing silicon wafers, at least based on the size and scale of total wafer shipments each year. TSM is not only the world's larger producer of wafers, but it also manufactures chips for other chipmakers or fabless chip designers, such as Broadcom Inc (AVGO), Qualcomm Inc. (QCOM), NVIDIA Corp (NVDA), Advanced Micro Devices, Inc. (AMD), Texas Instruments, Inc. (TXN), etc. These companies, in turn, supply some of the largest makers of consumer electronics, EVs, communications, hardware, household appliances, etc. It is reasonable to say TMC plays a crucial role in the entire semiconductor supply chain.
Enclosed are charts of the Semiconductor Index (SOX) and the major players in the semiconductor supply chain.
Semiconductor Index (SOX) – From the Mar 2020 bottom (1,233.07), SOX has rallied 2,035.05 points to 3,269.02 (2/16/21 all-time high) or appreciating 165% in less than 1-year. The strong SOX rally has quickly surpassed its bullish V-pattern breakout projection of 2,733.45 and, in the process, has created an overbought condition. A high-level consolidation has now developed between 2,759.20 (3/8/21 low) and 3,269.02 (Feb 2021 record high). There is also initial resistance at 3,130.02-3,141.02 (1/21/21 and 3/17/21 highs). A convincing surge above 3,141 can lead to a retest of the 3,269.02 all-time high. Above the record high, confirms the resumption of the primary uptrend, and suggests 509.82 points for the next technical target of 3,779, intermediate-term. On the downside, initial support rises to 50-day ma (3,040), and below this to 2,862-2,881 (1/27/21 and 3/25/21 lows) and 2,759.20 (3/8/21 low). A breakdown below 2,759.20 warns of a deeper SOX correction toward 2,449-2,532 (200-day ma, Nov 2020 breakout, and the 38.2% retracement from Mar 2020-Feb 2021 rally).
The top 10 holdings of the SOX Index account for 61.16% of the total market-cap weighting of the entire index. TXN (8.63%), INTC (8.43%), AVGO (8.10%), QCOM (7.39%), NVDA (7.39%), NXPI (4.31%), AMAT (4.30%), ASML (4.16%), LRCX (4.07%), and KLAC (4.06%). Note that the semiconductor stocks that have recently recorded new highs are in bold.
The top Semiconductor ETFs traded in the US are iShares PHLX Semiconductor ETF (SOXX), VanEck Vectors Semiconductor ETF (SMH), and SPDR S&P Semiconductor ETF (XSD).
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