Semiconductors: supercycle or superbubble?

{"text":[[{"start":null,"text":""}],[{"start":7.35,"text":"Good morning. Iranian state television reported details of a plan to extend the US-Iran ceasefire and reopen the Strait of Hormuz yesterday. The White House called the report “a complete fabrication”. Oil fell anyway. Does the market trust Iranian TV more than the US president? Perhaps, but a better explanation is that this market believes whichever side says the war will be over soon. Email us: unhedged@ft.com."}],[{"start":37.95,"text":"Today, I look at semiconductor stocks’ amazing surge and Hakyung writes about the industry’s vulnerable supply chain. "}],[{"start":44.2,"text":"Chip stocks"}],[{"start":45.800000000000004,"text":"It was possible to think, a few months ago, that semiconductor and memory stocks were moving towards the top of a standard industry cycle. Now it is clear that, because of AI data centre demand, something bigger is going on: either a wild speculative frenzy, or a supercycle — which is to say, a cyclical upswing supported by a permanent step-up in demand."}],[{"start":68.05000000000001,"text":"The Philadelphia Semiconductor Index, a broad index of chip and chipmaking equipment companies, is up 160 per cent in the past year, and many companies are up two, four or eightfold — with the memory companies, where supply is most constrained, leading the way:"}],[{"start":null,"text":""}],[{"start":83.50000000000001,"text":"You can see the magnitude of what is going on by looking at the year-over-year change in the Philly index. What is happening now, in terms of price action, is second only to the dotcom era:"}],[{"start":null,"text":""}],[{"start":93.60000000000001,"text":"So, is it a dangerous speculative frenzy, or a more benign supercycle? There is one crucial piece of evidence in favour of the latter view: the move in the shares has been, in aggregate at least, matched by growth in earnings. This chart below comes from Stacy Rasgon of Bernstein. Earnings estimates for the Philly index (the Sox) have risen 69 per cent this year, and that comes on top of a 55 per cent increase last year:"}],[{"start":null,"text":""}],[{"start":121.80000000000001,"text":"This is reflected in the fact that for many of the biggest companies in the industry, valuations have not risen in the past year. The price-earnings ratios of, for example, Micron and Broadcom are actually falling, even as those of Western Digital and Seagate rise:"}],[{"start":null,"text":""}],[{"start":137.65,"text":"Perhaps, though, it is chip sales, rather than semiconductor share prices, that are in a bubble? Are chips being sold into data centres designed to meet massive demand for AI services, demand that will never materialise?"}],[{"start":150.70000000000002,"text":"Demand is growing quickly for now. Rental rates for Nvidia B200 chips are up more than 20 per cent year to date, according to Bloomberg. Anthropic recently announced second-quarter revenue was $10.9bn, up 127 per cent from the first quarter. But it’s early. The hard fact is that while we know there are months or years of chip demand working its way through the supply chain, we don’t know how long the data centre boom will continue. It’s hard to see how anyone could know this, at this point."}],[{"start":184.25,"text":"What we can say is that semiconductors and memory stocks are now a very important contributor to the market’s overall gains. Over the past month, memory and semiconductor companies made up half of the total rise in the S&P 500. Chip industry fundamentals are very good and we need to hope they stay that way."}],[{"start":201.45,"text":"(Armstrong)"}],[{"start":202.79999999999998,"text":"The semiconductor supply chain"}],[{"start":204.95,"text":"Stock market returns, in the US and elsewhere, have come to depend on the booming semiconductor industry. That industry, in turn, depends on a supply chain that is concentrated and vulnerable. "}],[{"start":216.14999999999998,"text":"The Iran war has highlighted this. Critical inputs such as sulphur and helium are facing a supply crunch and prices have surged. The sharp drop in Middle Eastern oil exports has also created energy security concerns for South Korea and Taiwan, which dominate the GPU, advanced CPU and high-bandwidth memory manufacturing. Tensions with China across east Asia are a significant worry. A trade war, or plain old war, could slow or halt production or exports."}],[{"start":245.74999999999997,"text":"In addition to the geographic concentration, most parts of the supply chain are oligopolies or duopolies. Company-specific developments could also pinch supply across the industry — as was nearly the case earlier this week, with Samsung barely avoiding a labour strike."}],[{"start":261.5,"text":"Can investors hedge the risks, while maintaining some exposure to the sector? Not really. The industry is so interconnected that “any thread you start pulling unravels a long way back”, says Jonathan Goldberg of Digits to Dollars, a consultancy. Marko Papic of BCA Research says the hope is new industry entrants, including Big Tech companies’ in-house chip operations, grow up away from the concentrated hubs: "}],[{"start":null,"text":"

I don’t think there’s any alpha to be generated in picking who has the cleanest, more secure supply chain. The big step up is going to be when innovation comes in the form of companies . . . producing their own semiconductors and becoming competitors to their providers . . . 

There’s a lot of fragility in this entire ecosystem, but that’s going to be resolved because the prices are going up, and that’s how the free market resolves these fragilities.

"}],[{"start":287.9,"text":"Companies that have significant US manufacturing capacity include Texas Instruments, Intel, Micron and Samsung, which is building out more US capacity, according to Jonathan Cofsky of Janus Henderson. They could benefit if tension rises in the Taiwan Strait, for example — but only at the margin. For the time being, the semiconductor supply chain is a major economic risk the world simply has to live with. "}],[{"start":312.79999999999995,"text":"(Kim)"}],[{"start":313.84999999999997,"text":"One good read"}],[{"start":315.9,"text":"128 books in eight months. "}],[{"start":null,"text":"

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