By David Forest, editor, Strategic Investor
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Disease, epic blizzards, fire… and the looming threat of war.
It’s not “Game of Thrones.”
It’s real life, in the global semiconductor business right now.
These are real disasters. They all hit the microchip business the last several months:
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The Texas deep freeze in early 2021 shut down chip factories for Samsung, NXP, and Infineon.
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A freak fire idled another chip center in Japan in March 2021.
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Severe COVID outbreaks in Malaysia shuttered chip assembly and testing centers.
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Taiwan – the world’s largest chip-making nation – teetered on the edge of a Chinese invasion. (This past weekend, Taiwanese officials reported a major offensive by China’s fighter jets.)
These disasters couldn’t happen at a worse time. Supply chain disruptions from COVID are already wreaking havoc on chip supply around the world.
We’re just now getting data on the scale of the global shortage. There’s an information lag – the newest numbers show Q2 2021. The global chip supply was deeply in deficit.
Chip industry insiders admit this is a “severe shortage.”
Worst Shortage in a Decade
Chip inventories haven’t been this low in a decade. For the first time in over 20 years, stockpiles were in severe shortage for two quarters, back-to-back.
Think of all the tech developments in the last 20 years. Today, we’re using more chips than ever – in everything from phones to laptops to data processing centers.
Factories are turning out all the chips they can.
We’re still way short.
There’s a big reason why: completely new sectors soaking up millions of those chips.
One of the biggest is electric vehicles (EVs).
Chip demand from the automotive sector is exploding. Cars are expected to be the biggest source of growth in chip demand… for each year until at least 2025.
Over the next five years, chip use in car-making will grow over 10% annually.
Compare that to a sector like communications. We’re rolling out massive 5G networks around the globe. But even with that, chip use for communications is expected to rise a paltry 6.5% yearly.
Why are EVs soaking up so many more chips?
The obvious answer: EV sales are exploding. Global EV purchases doubled in 2021. In places like Germany, EV penetration jumped from just 3% to 13%.
But there’s a much bigger side to the EV chip story.
Few investors know about it yet.
The truth is: it’s not just that there are more EVs on the road today. It’s that each of those EVs needs more chips than ever before.
The chart below is stunning. It shows how many chips are found in an average EV.
In 2012, an EV used 567 individual chips. Not much more than a traditional internal combustion engine (ICE) vehicle.
But today, chip use in EVs is skyrocketing. Next year, an average EV will have nearly 1,500 chips – over 500 more than a traditional car.
That is massive growth. And this trend is accelerating.
Autonomous driving – coming soon to most major EV brands – needs even more chips.
Today, we’ve got vehicles that can “see” in front, behind, and even around corners. That requires serious hardware.
The chart below shows the jump in chip use for autonomous driving. Each level requires a huge increase in chips per unit.
When we go fully autonomous, it’s a quantum leap. That last step more than doubles the number of chips needed.
All of this is happening right now.
A Year of Reckoning for the EV Industry
2022 will be a year of reckoning for the EV industry. Finding chips is extremely difficult for car makers. That’s tough if you’re an EV company… but it’s great if you’re a chipmaker.
Companies making EV chips could be the best performing stocks this year. The EV-driven shortage is simply that massive.
This is a fight EV companies can’t lose. Battling for market share, they’ll pay any price to get the chips they need.
Without them… game over.
Fortunately, the SPAC boom gives us direct access to brand new EV chip investments. Several tech firms specializing in EV chips went public in new listings recently.
These aren’t household names like Intel, Samsung, or even Taiwan Semiconductor.
Don’t get me wrong. The above companies are going to do well. And I recommend having a position in each of these chipmakers if you don’t yet.
That’s one of the ways we lower our risk at Casey Research – spreading our bets across a basket of companies in an industry. And you can use the recent weakness in tech markets to get these names on a discount.
But the tiny, laser-focused firms are going to blow these big names out of the water.
They’re new names, so they’ve been mostly ignored by mainstream investors. But that’s all going to change in 2022.
The EV chip crunch will hit the news – and the financials of these tiny firms – in the next few months. That’s a potentially huge tipping point… rocket fuel for these micro stocks.
Couple that with the EV story going mainstream, and this is a space you don’t want to miss.
We’ll keep an eye on these new chip companies… and bring you the best ones. Stay tuned.
Keep walking the path,
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David Forest
Editor, Strategic Investor