Chip Shortages are Increasingly Becoming a New Bearish Risk, Inflation Bearish for Consumer Electronics - TFI's Kuo

October 18, 2021 6:26 AM EDT

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TFI Asset Management analyst Ming-Chi Kuo has offered his thoughts on the current dynamics in the tech sector.

On the ongoing chip shorate, Kuo said that “these shortages are increasingly becoming a new bearish risk.”

“In the past, component shortages usually represented strong demand, structural changes in demand, or opportunities for lifting prices. However, more and more investors are now seeing shortages as a negative. For components in short supply, the increasing range and frequency of price increases have slowed significantly. For components that are not in short supply and end products, shortages mean that shipments will be lower than expected,” Kuo wrote in a client note.

Furthermore, the “information asymmetry” has created another bearish dynamic that is hurting the sector.

“The reason for the overbooking from distributors and the significant increase in parts inventory is the severe information asymmetry between the supply and demand sides. The motive of overbooking for distributors is to reduce the uncertainty of supply caused by port congestion, so the orders received by the supply side may not necessarily reflect the actual market demand. This phenomenon is pronounced in consumer electronics. Order cutting due to increased costs will cause shipments to fall short of expectations. We believe that if the increase in freight rates causes the selling price to increase by 20–30% or more, many brands will stop production to avoid slow sales after raising the selling price. The most notable examples are TV and Chromebook,” Kuo added.

Kuo has also weighed in to discuss the high likelihood that will see higher inflation in the quarters to come. The analyst argues that “inflation and the post-COVID-19 economy have led to structural changes in demand,” which will negatively impact the tech sector starting from 1Q 2022.

“Because consumer electronics are not a necessity, inflation is not favorable to consumer electronics. In addition, most of the demand for consumer electronics replacement has been satisfied in the past two years, so if products cannot provide an innovative user experience, most of the demand for consumer electronics may decline more significantly in the inflationary era. Most companies currently blame the order cuts on component shortages or port congestion, but we believe that the order cut may also reflect the structural changes in demand. It is difficult to judge the actual impact of structural changes in demand on order cuts, but we predict that the matter will become more apparent in 1Q22 at the earliest.”

On a more positive note, the tech sector should return to innovation-driven demand growth in 2022 after the supply-demand dynamic becomes more balanced. Kuo expects key consumer electronic players to focus on head-mount-display (HMD) devices (AR/VR/MR/XR), folding phones, infrastructure and related IoT devices, and electronic vehicles (EV).

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