Neon Supply-chain Issues Could Hurt Chip Stocks
Neon gas is a critical input in the production of microchips and most of the U.S. supply is sourced from Ukraine, which means any intensification of the Russo-Ukrainian War could further exacerbate existing supply chain problems in the sector.
Chip stocks have taken it on the chin lately, with some of the biggest companies in the sector down 30% from 52-week highs observed last fall.
Of course, with the Nasdaq dropping alongside with other global indices, it’s no great surprise to see the chip sector weakening, as well. Since notching an all-time closing high above 16,000 last November, the Nasdaq is now down roughly 14%
Interestingly, the iShares Semiconductor ETF (SOXX) is down almost exactly the same amount over that same period—about 14%.
But the carnage amongst some of the best-known chipmakers has been a lot more intense, with many of the household names down 20-30% in the last several months.
For example, NVIDIA Corporation (NVDA) has dropped 27% since late November, while Advanced Micro Devices (AMD) is down 30%. Interestingly, recent pullbacks in Qualcomm (QCOM) and Intel (INTC) have been more modest, at 14% and 18%, respectively.
For some investors and traders in the space, these pullbacks have undoubtedly served as an attractive opportunity to dollar-cost average into positions with a lower cost basis.
And with the technicals in the sector looking favorable, it’s also worthwhile to briefly review the current fundamentals.
Fundamental Outlook
As most market participants are well aware, the chip sector has been fighting a supply-chain problem that ultimately pushed back lead times for new bulk orders to 12 months out. That means if put through a bulk order for chips right now, the order wouldn’t be delivered until at least February 2023.
Reports suggest that lead times are still close to 12 months, but the good news is that the rate at which lead times had been increasing appears to have slowed. That means the most pessimistic scenarios—projecting that lead times could increase to 16 months—are off the table for the time being.
With demand for chips remaining historically strong, one would think that the ability to sell more chips—due to the increased availability of supply—would be favorable for the industry.
To wit, most chip manufacturers have released promising earnings reports during Q1 2022.
AMD, for example, recently reported that the company’s revenues were up a startling 49% year-over-year, and 12% quarter-over-quarter. NVDA is expected to release its earnings report on Feb. 16, and expectations are high for that report, as well.
So with earnings looking rosy, and supply-chain constraints moving in the right direction, it makes one wonder why the sector has been under pressure in terms of performance.
Weakness in the broader stock market certainly has to be one reason for the pullback in chips—that’s how correlations work. And certainly, rising interest rates are another factor, because rising rates generally translate to rising financing costs—the latter of which can cut into profitability.
However, it appears that geopolitical concerns in Eastern Europe may also be weighing on the semiconductor industry.
Impact of the Russia-Ukraine Conflict on the Chip Sector
Beyond the current trading environment, and the impact of rising rates, one other headwind for the chip sector appears to be tied to rising tensions in Eastern Europe.
Ukraine certainly isn’t a significant hub for emerging technologies, but it is a hub for basic/raw materials—one of which is neon gas. Neon gas also happens to be an important resource used in the manufacturing of chips.
Critically, it’s estimated that 90% of the neon consumed by U.S. chip manufacturers comes from Ukraine, according to Techcet. The fact that Ukrainian neon originates in Russia—as a byproduct of steelmaking—further complicates the matter.
Considering the current tensions between Ukraine and Russia, it’s easy to see why companies that rely on neon from the region might be “sitting on pins and needles.” The sector has been fighting supply-chain constraints for almost two years now, and is now facing yet another setback.
Back in 2014, when Russia first annexed the Crimean peninsula from Ukraine, neon prices jumped 600%. And while neon gas is specific to the chip industry, it serves as a good example as to how a full-scale war in Eastern Europe could cast a dark shadow over the entire global economy.
That pessimism has likely seeped into the mentality of global investors and traders, which has undoubtedly contributed to the “risk-off” mentality in the financial markets of late.
Investors and traders seeking to track and trade the chip industry can add the following tickers to their watchlists: Advanced Micro Devices (AMD), Applied Materials (AMAT), Intel (INTC), KLA Corp (KLAC), Micron Technology (MU), Nvidia Corp (NVDA), Qualcomm (QCOM) and Taiwan Semiconductor Manufacturing (TSM).
These sector ETFs, focusing on chips, may also be of interest: iShares PHLX Semiconductor ETF (SOXX), VanEck Vectors Semiconductor ETF (SMH), SPDR S&P Semiconductor ETF (XSD), Invesco Dynamic Semiconductors ETF (PSI), ProShares Ultra Semiconductors (USD) and First Trust Nasdaq Semiconductor ETF (FTXL).
Traders may also want to review a past installment of This Week In Stocks on the tastytrade financial network for further insight on the semiconductor market landscape.
To track everything moving in the financial markets, readers can also tune into TASTYTRADE LIVE—weekdays from 7 a.m. to 4 p.m. CST—at their convenience.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to support@luckboxmagazine.com.
