A Stock Trader's Guide to Navigating the Chip Industry

It’s getting complicated for investors in semiconductor stocks, with last year’s big chip shortage morphing into an inventory glut for some companies, and others getting caught up in geopolitics.

The Covid-19 pandemic spurred an unprecedented supply crunch, shutting down semiconductor factories while also fueling demand for consumer electronics. Now, some chipmakers are warning of cooling demand for parts used in PCs and smartphones, while carmakers continue to wrestle with a shortfall of certain chips.

Another fly in the ointment is renewed tensions between the US and China over the Asian nation’s burgeoning semiconductor industry, with equipment giant ASML Holding NV caught in the middle.

“Supply constraints are not being felt equally,” said Angelo Zino, senior equity analyst at CFRA Research. “The biggest customers are getting priority (Apple, data center players) while more fragmented industries that are not as relevant to the chip industry (industrials, autos) are being pushed to the backburner.”

The complicated supply situation, higher interest rates and possible recession have all contributed to a chip-stock slump this year. A 37% rout for the Philadelphia Semiconductor Index, or SOX, has wiped out about $1.4 trillion in market value.

Here’s a breakdown of the sector’s supply quandary: