Legacy Research Group

Chris: You wrote about it in your free eletter The Bleeding Edge. Apple is having trouble getting chips. This may make some people very worried about the future of tech investing, and tech in general. As I understand it, semiconductors or chips go into pretty much everything.

So what is going on there? Is this a catastrophe for tech? Or is it an opportunity?

Jeff: Well, it’s definitely not a catastrophe. This has not been covered well by journalists and the financial media. They have not done a good job explaining what’s really happening here.

First of all, for context, the semiconductor industry always goes through these types of cycles, where demand reaches a point where the manufacturing production capacity is strained. And, of course, the prices of semiconductors go up, which is exactly what we’re seeing now.

And then, the industry tends to overbuild and build additional semiconductor capacity. It takes time. But over a couple years, eventually, the demand for the product starts to slow down. And then, there’s excess manufacturing capacity. And the prices of semiconductors drop.

Typically, some players in the semiconductor industry would have a period of time where their stock prices may be stagnant or decline a bit.

This is a normal cycle. It has existed for decades, since the beginning of the semiconductor industry. So in that regard, there’s nothing special about what’s going on.

But this time is unique, in the sense that there was a belief, during the pandemic, that we were going to enter a recession, that this would cause an economic crash. But the reality was our economy was so strong pre-pandemic, so strong in 2020, that it powered right through the pandemic. The demand never dropped off.

That demand continued to be so strong surprised a lot of the industry. So the fact that we’re seeing increasing semiconductor pricing is great for the tech industry, especially for semiconductor manufacturing. Your gross margins are improving. Your free cashflow is improving. You have more capital to invest in more manufacturing capacity, as well as new semiconductor technology. That’s great for the industry right now.

This demand seems incessant. And it’s coupled with this drive towards electrification. So what we’re seeing in the automotive sector right now is remarkable. Companies are making a faster shift towards (electric vehicle) EV technology than was originally anticipated.

And any time you move from an internal combustion engine to an EV, the amount of semiconductors in the cars increases dramatically. Multiples of where it would be for a typical internal combustion engine vehicle. So what’s happening in the automotive sector is actually exacerbating this supply crunch in the industry.

Now, again, these things are great. They show economic strength and growth, and technological advancement and major shifts in the industry.

Even the move from 4G to 5G is contributing to the tech shock here. The reason is that everyone wants to upgrade their 4G phones to 5G phones. They’ve been sitting on old phones for three years, on average, waiting for the upgrade. And now is the time.

So we’re seeing this shift in the automotive sector. We’re seeing this shift in the mobile sector, the entire consumer electronics sector. We’ve got not one but two new video game consoles, the PlayStation 5 and the Xbox X. And right around the corner will be mass market, augmented reality eyewear, which again, requires more semiconductors.

So this is a storm. This is a confluence of quite a few events happening at the same time. And it really is creating some fantastic investment opportunities as I look into 2022 in this sector.

Chris: Jeff, you’ve given your readers a chance to make triple-digit gains already on some semiconductor stocks in The Near Future Report portfolio. But is the play here to buy semiconductor stocks? Is it to invest in the chipmakers, because there’s just going to be demand out the wazoo for as long as we can see?

Jeff: Well, there are definitely companies that are beneficiaries of everything that’s happening as a result of the tech shock… and will continue to be so.

This isn’t going to disappear in the next few months. In fact, it’s going to get worse over the next few months. We’re going to experience these issues as we look into 2022. This time next year, we’ll still be dealing with this. It won’t be as severe as what we’ll experience this holiday season, but it will be still material and significant.

There are great semiconductor companies out there that are benefiting from everything that’s happening. There are great foundries – companies that are basically contract manufacturers for semiconductor companies.

There’s even great companies that are involved in intellectual property around semiconductor technology that can benefit from this as well.

But even aside from the semiconductor industry, the shift towards essentially what I think of as digitization, or digital-first products and services, has been accelerated by about five years as a result of the pandemic.

Chris, as you know, we’ve all had modifications in our lifestyle, in how we do things, normal things, throughout life. And we are spending a lot more time online, whether it be e-commerce or for entertainment or for productivity, for meetings, and less time traveling like we used to.

So that’s naturally having a much broader impact on the economy, on society, and of course, on what types of companies are thriving in this type of an environment.

Chris: So it sounds like you actually see this as a bullish indicator. Because what you’re looking at is this surging demand. I mean, there have been the COVID-19 disruptions and the supply chain disruptions, but beneath those is the fact that there’s so much demand for tech. And that’s bullish for the tech sector.

Jeff: It really is. And believe it or not, it actually flows into the biotech sector as well. The reason is that the advancements we’re seeing – in computing power, cloud computing, artificial intelligence, and machine learning – are directly impacting the biotech sector.

Biotech is now able to use all of this artificial intelligence and the computational power to accelerate their own therapeutic developments. They’re able to do things in days that used to take years.

We’re at that inflection point, where we’re starting to see the impact on therapeutic development from these technologies. I’ve never been more excited about what’s happening in the biotech industry than I am right now, based on what’s happening.