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Is UMC’s share price a standout in the semiconductor investment theme?

Chipmaker United Microelectronics Corp’s [UMC] share price has gained thanks to the global semiconductor shortage. Over the past 12 months, UMC’s share price is up circa 308%, with the gains accelerating mid-November last year. However, last week the stock closed down 6.5% after it missed revenue expectations in Q1 earnings on 28 April. 

That said, with manufacturing plants at full capacity and demand increasing, UMC and rival Taiwan Semiconductor Manufacturing Company [TSM] can’t make its wafers quick enough. In an effort to plug the gap, UMC is upping capacity.


UMC's share price rise over the past 12 months


Why UMC’s share price could benefit from expansion

Despite chipmakers expanding production of advanced chips, the supply of 28 nanometre and other mature chips is falling short of demand — a problem that is only likely to worsen.

Taiwan-based semiconductor manufacturers are all running at full capacity for 28nm and have reached deals to supply their clients up to the end of 2022, according to industry publication DigiTimes

To cope, UMC plans to manufacture 20,000 of the 28nm wafers at its fabrication plant in Tainan, on Taiwan’s southwest coast.

“There is a supply-demand imbalance in mature nodes. We have seen lots of capacity expansion in advanced nodes, but companies have not addressed the mature nodes. There are lots of critical components on those nodes,” said Liu Chi-tung, UMC’s CFO.

“There is a supply-demand imbalance in mature nodes. We have seen lots of capacity expansion in advanced nodes, but companies have not addressed the mature nodes. There are lots of critical components on those nodes” - Liu Chi-tung, UMC’s CFO


What makes the expansion unusual is that UMC will supply the chips in exchange for financial guarantees. Up until now, the market has operated a supply and demand model, which has been found wanting as the shortage continues. However, UMC’s expansion won’t be off the ground until the second quarter of 2023.

UMC’s revenue streams have benefited from the increased demand. 2021’s sales to March came in at $16.6m, a 14.06% increase year-on-year. In the first quarter of 2021, revenue growth came in up 11.4% year-on-year to $1.65bn, although this missed analyst estimates of $1.68bn — hence the wobble in UMC’s share price. However, earnings per share came in at $0.149, topping the expected $0.10 and up 347.4% year-on-year. UMC is expecting the average selling price of its chips to increase 10% this year. Should this happen, along with consistent demand, UMC’s share price dip could be a buying opportunity.


Why should investors care about the semiconductor investment theme?

Computing chips are like gold dust now. Factory closures due to COVID-19 surges last year, the increasing digitisation of cars and household appliances, and the US-China trade war have all contributed to the demand-supply imbalance.

What started as a shortage in the automobile sector has now spread elsewhere — just try to buy a Sony [6758] PlayStation 5 or Microsoft [MSFT] Xbox Series X any time soon. Apple [AAPL] supplier Foxconn has warned that the 5G rollout could be delayed, while both Ford [F] and BMW [BMW.DE] have warned of a deeper-than-forecast production hit due to the shortage.

The problem is exacerbated by the fact that, while demand has increased, the number of chipmakers has shrunk. Technology companies, including some chipmakers like AMD [AMD], outsource manufacture of chipsets to places like UMC and Samsung [005930].


Rise of the semiconductor investment theme over the past 12 months


Expectations are that the chip shortage will continue into next year. To counter this, companies are ramping up manufacturing capabilities, with some looking to compete with USM and Taiwan Semiconductor Manufacturing Company [TSM] on the made-to-order market. Intel is investing $20bn on new factories in Arizona. Part of this investment will be to create Intel Foundry Services, which will manufacture core chips for external clients using Intel technology. Samsung is also reportedly scouting sites in the US to build a $17bn plant with the same aim.

So, are there any gains to be had? The semiconductor investment theme is up circa 93% over the past 12 months, according to our screener (as of Friday 30 April). However, over the past month, the theme is down slightly more than 3%. This could point to the upsurge in demand already being priced in to company share prices. Yet, if the shortage continues, semiconductor prices are only going to go up. That could be good news for manufacturers in the short to medium term.

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