Chip scarcity turns out positive for semiconductor stocks

The global silicon industry is made up of hundreds of different types of chips, with the most flashy ones from NVIDIA, Qualcomm Inc. and Intel Corp. costing anywhere from $100 to more than $1,000 each. These are the ones that fuel your machine or the gleaming smartphone in your pocket. The chip industry has been facing increasing difficulty due to the scarcity of display drivers, which are used to transmit specific instructions for lighting the screen on your device.

The chip crisis arose from an understandable blunder when the coronavirus pandemic struck last year. As Covid-19 first spread from China to the rest of the world, several businesses predicted that as things got tougher, and that people would cut back. People who were stranded at home began purchasing technology and then continued to do so. They upgraded their computers and displays to enable them to work effectively from home. Moreover, smartphone manufacturers have also been affected by chip shortages, which happened to occur just as the production for 5G handsets, such as Apple's iPhone 12 smartphones started ramping up. 

Several Wall Street analysts pounded the table for semiconductor stocks, claiming the sector's continued chip shortages as a positive sign. Chip shortages are a tailwind for stocks, according to Vijay Rakesh, an analyst at Mizuho Securities. He further recommended that investors stick to semiconductor stocks for the second quarter and beyond as he believes this shortage will support a stronger-for-longer cycle in 2022.

For those unfamiliar, NVIDIA a multi-tech company, is the producer of primary graphics processing unit (GPU) with its products implemented in consoles, computers, the automotive market, and even cryptocurrency miners. Nvidia (NVDA) is one of the top gainer among semiconductor stocks. At its online GPU Technology Conference, the graphics-chip manufacturer made lots of new announcements. Grace, the company's first data-center central processing unit, was one of the products revealed at the conference.

In a transaction that could reshape the chip industry, NVIDIA is attempting to buy Arm, a British chip maker that designs the architecture used by virtually all mobile devices, from Softbank for $40 billion.

On the whole, chip shortages are proving to be a tailwind for semiconductor stocks because of its’ extremely high demand and shortage in supply, giving the manufacturers a consolidated sense of power in pricing them and analysts also seem to be bullish about the long-term prospects for semi-cap industry, believing that the stocks still have space to fly.

​Written and Edited By: Kabir Chadha