Samsung warns of deepening semiconductor shortage

Yahoo Finance's Brian Sozzi, Myles Udland, and Julie Hyman speak with Futurum Research Principal Analyst, Daniel Newman, about the global chip shortage.

Video Transcript

MYLES UDLAND: All right, let's turn our attention now to the semiconductor market. We've talked a lot about a chip shortage globally. Samsung coming out with some comments over the last 24 hours, calling a serious imbalance in supply-demand of chips in the IT sector globally. Joining us now to discuss is Daniel Newman. He is a principal analyst over at Futurum Research.

Daniel, thanks for hopping on this morning. So, how are we to think right now about this global chip shortage? And how concerning is it for tech companies that are saying lots of things like this, but we haven't quite yet seen the kind of mass product delays, though I presume those are anticipated?

DANIEL NEWMAN: Well, first of all, good morning, Myles. Thank you, as always, for having me. It's great to be back. I came on, I think it feels about a month ago, as this was really a breaking story, and it seems that nothing has really changed. So we had President Joe Biden came out with that 100-day review. And I think it provided a bit of a calming effect. We heard there was going to be this review done and that we were going to work on fixing the shortage. But overall, the comments that came out yesterday from Samsung only further reiterate that there are delays on the horizon.

And by the way, they're not really new delays, and they're not really things that we haven't felt. We're just feeling them deeper. And they're cutting across more industries and now having a bigger impact on more companies. I mean, automotive, gaming, you know, mobile devices, PCs, data center-- all these are being impacted, and it's really because most of the chip makers here have gone fabless, meaning they're dependent on production being done overseas.

So the factories like TSM-- you heard from Samsung and others-- have hit their constraints. They've hit supply levels. And then, of course, we had the winter storm here, which brought down the limited production, right? I think it's about 12% of the chips are produced here in the States. And Samsung's factory here in Texas, for instance, was brought down for over a week, which only put more pressure on supply.

So, a number of extenuating circumstances. And we just don't have a solution yet. You know, like I said, President Biden taking some time to investigate what's going on is a step. But that's going to fix the next shortage. This shortage is going to need to take its course.

JULIE HYMAN: So Daniel, to take a step back, I mean, obviously, we understand weather-related effects, but, like, when you're talking about some of the overseas factories, what's the capacity constraint? Like, why can't they make more than they're making? Is it just the factories are already running 24 hours, and they're running every machine they have? And this is all they can make?

DANIEL NEWMAN: Yeah, so every time you want to, first of all, make a different chip, there's different setup, right? It doesn't-- you can't just say, OK, we're going to switch from this process node to another process node and instantly just start pumping out volume. Machinery needs to be reconfigured to pump out different chips.

And so, when we talked about this last time, we talked a little bit about what happened with certain companies thought certain trends were going to be impacted by the pandemic. We thought in the beginning, that no one would want smartphones and for a short period of time, that there was a significant decline, but by the third quarter, demand had returned. Nobody thought that automotive would reach such high demand requirements during the pandemic. And we've seen automotive has been off the charts upon the reopening of factories. It's hard to get automobiles right now, and each one of these can have anywhere from a few hundred to thousands of chips in each of them.

So, these factories can't just pivot on a dime. They're-- you know, the forecasts were off. The companies that came back in got moved to the back of the line for production. And so the entire system got broken throughout this process. And now they're trying to get it back on, on schedule. But you can't just instantly enhance these supply requirements. And it's got to be worked through.

And like I said, as long as this demand stays above normalized demand rates, the only thing that's really going to push this forward is going to be a growth in capacity, which could be from onshoring or expanding capacity. But that will take some time.

BRIAN SOZZI: Daniel, what is this shortage continuing? What does it mean to some of the biggest chip stocks? Because the way I process it in my head, I'm thinking chip shortage, prices up, earnings up, earnings beats. What's wrong in that thesis?

DANIEL NEWMAN: Well, if I'm fully understanding your question, Brian, the chip industry or the semiconductors as a whole have had pretty strong results throughout this entire process. First of all, despite the missing supply, like we saw with, like, for instance, Qualcomm had good earnings last quarter, but it said itself, if it could produce at higher volumes, its numbers would have been even bigger.

So these companies are hitting on all cylinders and delivering as we saw record breaking PC numbers. We saw smart televisions. We saw iPads and tablets hitting the edge of their demand and capacity, and also, customer interest around the holidays. All those things happened at one time. It drove a ton of volume and sales, which hit those bottom line and top line numbers, Brian, which drove great results.

But at some point, like what's happening with Samsung today, you start to have this whole supply issue of being able to come out with their new devices. And those new devices tend to yield big momentary selling. So they don't have a new Note device. That might lead to a slower replacement cycle. That slower replacement cycle may lead to a decrease or decline in revenue over a short period of time.

And that also brings into question some of these cycles that we've seen. We've seen these super cycles with Apple. We're also seeing an annual new device coming out. And at this time, Apple saying it's not constrained. But Samsung's saying it is, so no new Note this year, potentially. Now all of a sudden, you have sales impacts. You know, that could be a decline in revenue to some of its biggest flagship products. And people are going to say, I'm going to wait. I'm not going to get the new device.

So, so far, this constraint has been significant enough that things like Playstations and Xboxes are hard to get. You have to overpay for them. Automobiles are harder to come by. We're seeing $2 microcontrollers going for $14 now. So you're seeing 700% increase, which, of course, is good for margin in terms of earnings, but it's bad for volume, and it can be bad throughout the entire supply chain.

So it hasn't hit to the point yet where earnings have been crushed, but if we don't get this capacity met and we don't start to see ways for us to manufacture more, you've got AMD and Nvidia and Qualcomm and so many of these fabless chipmakers all dependent on a few producers to be able to hit numbers, hit targets. And it could definitely have an impact throughout the entire semiconductor industry.

MYLES UDLAND: All right, Daniel Newman, principal analyst at Futurum Research. Daniel, always great to get your thoughts. Thanks so much for hopping on this morning.

DANIEL NEWMAN: Thanks, Myles.