The global chip supply shortage of 2021 began to ease towards the end of 2022 as falling PC and smartphone sales reduced chip demand. Major chipmakers saw their revenue fall in the second quarter as they reduced production to clear inventory. On one hand, you see PC and smartphone demand falling. On the other hand, you see demand for automotive chips rising. This chip shortage and demand pullback reminds me of the 2018 episode when the U.S.–China trade war began.
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A monster opportunity in the current chip industry
Semiconductor is the next oil as it will power everything from cars, phones, smart homes, smart cities, hospitals, data centres and more. In the early 2010s, America moved most of its semiconductor manufacturing to Taiwan and China as they offered economies of scale.
Chip production is one of the most expensive. The more advanced the chip the higher the production costs. Thus, the industry has needed a lot of government incentives to make manufacturing feasible.
But as we move into the artificial intelligence (AI) age, computing power can determine an economy’s strength. The 2021 chip supply shortage, growing mistrust towards China, and Russia-Ukraine war led to the creation of the CHIPS Act. Semiconductor manufacturing, once concentrated in a few countries, is now diversifying. America, Europe, and India are vying to build chip plants and become self-reliant.
The world’s largest third-party chip manufacturer Taiwan Semiconductor Manufacturing Company (NYSE: TSM) is building chip fabrication facilities in America. Even Intel jumped into the foundry business and is leveraging government subsidies to build several foundries in different geographies.
This is a good time to invest in chip manufacturing companies as major economies look to become self-reliant in semiconductor manufacturing to ensure the safety of critical technology.
One chip stock to buy and hold forever
Being ahead in technology advancements is crucial in the semiconductor industry as it determines market share. Intel lost its advanced node advantage to Advanced Micro Devices and, consequently, the former continues to underperform other semiconductor stocks.
But TSMC is leading the race in advanced nodes. It makes chips for all major companies like Apple, AMD, and Qualcomm. Irrespective of who wins the chip market share, TSMC will be booked with orders.
Samsung Foundries is its closest rival. Apart from tech advancement, Intel has a major disadvantage. It is also a chip designer and rival to other semiconductor companies. Semiconductor companies might not be willing to join hands with a rival and hand over their intellectual property. Hence, I remain bearish on Intel’s growth prospects.
TSMC, on the other hand, has significant growth prospects. It is currently facing revenue declines as PC and smartphone sales slow.
But not all days will be gloomy. The 5G revolution will create the ecosystem for the Internet of Things proliferation. The AI boom will see drones, robots, smart cities, and autonomous cars using increased semiconductor content.
Investing tip
The right time to invest in TSMC is now when it trades 33% below its January 2022 peak. You can invest in TSMC through your Tax-Free Savings Account (TFSA) and grow your money tax-free. The stock has jumped 150% since the 2018 dip.
