Update: The SOXX ETF mentioned in this post was sold Dec. 16 for a small gain, as recorded in the post “How LIBOR’s death could affect investors”
The chip industry is notoriously cyclical, alternating between shortages and surpluses in chip production. This is because supply turns like an ocean liner in reponse to changes in demand; to boost supply requires heavy investments in new equipment and plants, a process that can take a year or two to complete.
The most reliable indicator of turning points in the chip cycle is lead time – the delay customers experience between ordering and receiving new chips.
Data from Susquehanna Financial Group shows that over much of 2021 the average lead time has bounded upwards to reach nearly 21 weeks in September, way above the average of 13 weeks during the previous three years to 2020.
Demand is thus still strong, so the upward phase in the cycle could have a ways to go. Predictions of an end to the chip shortage range from Tesla CEO Elon Musk’s date of early 2022 to Ford Europe chairman Gunnar Herrmann’s date of 2024.
So, it may still be worth holding chips stocks such as Micron and Qualcomm. Or even the badly lagging Intel as a value play. Another way to participate is through chip ETFs, the big daddy being iShares Semiconductor ETF (SOXX).
But it is rather late in the chip upcycle. The SOXX has gained nearly 50% during the past 12 months and Susquehanna Financial Group reports that the uptrend in lead time slowed a lot in October, rising by just a day to an average 21.9 weeks.
So it could be late innings. Investors need to be ready to cut bait when chip supply looks like it’s heading toward a glut. Stop loss orders could make sense.
If you are willing to ride out the retrenchments, you could be OK too. Over the last ten years, the average annual return in the SOXX has been 27%. Since inception in 2001, it has been 10.8%.