The global chip shortage is a ‘perfect storm’: strategist

Brad Gastwirth, Wedbush Securities chief technology strategist, joins Yahoo Finance to discuss the growing impacts of the chip shortage as Ford and General Motors are forced to halt production.

Video transcript

JULIE HYMAN: Let's, though, talk about the chip shortage and its ever increasing consequences, so it seems. The latest from Ford and GM, they're idling, they're extending the shutdowns that were already going on. GM is doing temporary plant closures for a week or two. And it's closing down more production now. So a lot of questions are persisting about how long this is going to last, who it's going to affect the most.

Brad Gastwirth is with us now. He's Wedbush Securities Chief Technology Strategist. Brad, it's good to see you. As we look at what seems to be this ever expanding list of effects from the chip shortage, what can we expect? I mean, are people going to be able to buy the cars they want this year?

BRAD GASTWIRTH: There's going to be a--

JULIE HYMAN: Oh, Brad, I think you're muted. Oh, no, I think we got you.

BRAD GASTWIRTH: Yeah, so ultimately, it's going to be a pretty-- you'll still have an inventory at dealerships. It's not going to have any impact here in the very near term. That being said, this is going to be an issue for quite some time. And we're certainly in the camp that these shortages are going to be more severe and longer lasting than I think most people expect.

Heading into this year, chip shortages and the severity was one of my largest predictions for technology for 2021. I thought it was going to be more severe than most people expected. And that's certainly playing out. The issue here, it's almost a perfect storm. You have leading, lagging, and mature foundry. The places that build the semiconductor chips all are very constrained. On top of it, you have raw materials that have some issues.

And then you also have some situation-- I'll start with if you look at Taiwan where a lot of manufacturing takes place, they have a water shortage. And you need water to help with the process. If you look at Texas, where Samsung has manufacturing, you had the severe weather that caused shortages and caused the plant shutdowns. So there's been this sort of perfect storm approach.

And then, all this being said, you have the pull in of digitalization. Because of the pandemic, you have all this new demand for areas that were really going to be further down the road. So robotics, automation, more of digitalization, move to the cloud, all of this and 5G is really stressing the network and stressing production and chips. And it's not going to end anytime soon.

BRIAN SOZZI: Brad, isn't this going to cause-- the shortage going to cause massive price inflation in consumer electronics and autos? This is college 101 stuff here, a whole lot of demand and a whole-- not a whole lot of chips to go around.

BRAD GASTWIRTH: Yeah, it's a perfect question, exactly the right question and the right analysis. It's going to cause severe inflation. And I find it hard to believe it's sort of interesting that some people don't see this coming. And price inflation is by far happening. I speak to companies in Asia every night. And if you talk to the companies out there, they're very happy because in the supply chain, they play a key role. And their pricing is going a lot higher, which means their margins are improving as well. So you're going to see margin improvement across the semiconductor space.

The other interesting point that I didn't mention previously was this is the first time in my career that I've ever seen semi capital equipment companies or the companies that actually make the equipment to make chips, they're not able to make the equipment because they're short chips, which is bizarre. So this whole thing is going to stress the networks. And to your point, yes, prices are going to go up a lot.

MYLES UDLAND: You know, Brad, we're seeing this story kind of play out first through the automakers and kind of the pressures that they're facing. Is this like-- is this the lowest hanging fruit maybe in the supply chain? I mean, when I think about how they play in cars, it's a little bit, in my view-- maybe I'm wrong-- it would be a little bit less high tech than some of the more advanced tabs that go into a phone or something like that. So is this just the beginning of kind of a knock-on effect down the supply chain, and I guess, down the finished goods chain as a consumer.

BRAD GASTWIRTH: Yeah, another great question. I mean, yes-- the direct answer there is yes. This is the beginning of it. If you look at companies that manage semiconductors, the automobile supply chain is probably the least effective and the least prepared for this type of situation. And if you look at semiconductor content in automobiles, it has increased dramatically over the last several years. So they're not used to this problem. And they certainly weren't prepared at all.

However, this is to your point. A lot of it is on more mature technology. If I look at some of the advanced technology that is going into some 5G and some of the newer technologies, that's also severely constrained. So the leading foundry, Taiwan Semiconductor, is a stock that we like very much here at Wedbush. And they just reported record numbers. You're going to see those numbers continue to do well. But the issue is not just that leading or lagging. It's across the board.

And then on top of it, you don't even-- there isn't equipment available to make chips right now. So you can buy space, but you can't fill it with equipment to make chips. So this is going to last for at least another 12 months. It's going to impact many industries. We're seeing it in autos. It goes to your point. And I agree it's lower hanging fruit.

JULIE HYMAN: Brad, I started off by asking you if people are going to have trouble getting stuff. I guess the accompanying question-- we already know prices for chips are going up. Are we going to be paying more, and when, for cars, for phones, for computers, for-- I mean, chips go in a lot of stuff at this point-- refrigerators.

BRAD GASTWIRTH: Yeah, and yeah, to the earlier question as well, inflation is going to come. And it's already starting to-- it's certainly happening within the supply chain. From substrate to passive components to really mature technology, then going into the lagging technology, all of it-- all of these companies are raising prices. So when it gets to the OEM, the manufacturer, the companies like an Apple or a Samsung, that supply chain has really increased prices three or four different times throughout that supply chain. So, you know, of course, these prices have to go up. And you're going to see price inflation across the board. And it is happening.

So the other thing that's interesting to watch-- and this can only happen in certain places like PCs. But you'll likely see some despecking, meaning that you're going to see some maybe less components if it's memory. Instead of seeing 16 gigs of DRAM, maybe you see 8 gigs, because pricing is going up so much. But if I just look at DRAM in memory, prices have gone up dramatically on the DRAM side. If you look at 32 gig DIMMs, which is just one little configuration, it's gone up around 50% this year. So that's a pretty big impact to a lot of different areas. And almost everything needs storage capacity.

MYLES UDLAND: And then, Brad, finally before we let you go, I just want to ask about the trade here. I mean, everyone knows that semi and CapEx is going up. Everyone knows margins are going up. We've seen the reaction in the sector broadly. How do you think about the trade at this point? And are there any names that you guys like more or less? Or how do you walk clients through the question of, yeah, we know the stock is up 120% or whatever in a year, but this cycle still can run.

BRAD GASTWIRTH: Yeah, and that's really the trillion dollar question, right? And it's the right question here. So I mean going into this year, our favorite and one of my three tech predictions with 2021 was Western Digital, WDCE. It's a name we like very much at Wedbush. And the stock's already gone up over 50%, 60% year to date. I think there's still probably could maybe double from here. But truthfully, if you look at semiconductors in general, that whole space is going to still continue to do well.

And, you know, to your point, a lot of people know it because it's being reported about shortages. But the sentiment is not 100% bullish. You have a very mixed bifurcated sentiment right now in investors. So there's investors that certainly are in the camp that this shortage is going to be super-- is going to be shorter lived than my belief. And my belief, this is a one to three-year frame of a continuation of a shortage. And I think all semiconductor and semi cap equipment will continue to benefit. That's not a unanimous view on the street. So, you know, while there is known shortages, specifically in autos and some semis, I don't think the severity is truly understood.