Hi everyone,

I want to start by clarifying that this is not financial advice.

I believe that there is a semiconductor bubble that is anywhere between 2 to 3 quarters from popping.

A combination of growing recession, war, supply chain, and decreasing demand pressures exasperated by overvaluation in the chip space is a ticking time bomb.

Let's start by reviewing the decreasing demand for semiconductors...

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WASHINGTON—April 6, 2023—The Semiconductor Industry Association (SIA) today announced global semiconductor industry sales totaled $39.7 billion during the month of February 2023, a decrease of 4.0% compared to the January 2023 total of $41.3 billion and 20.7% less than the February 2022 total of $50.0 billion. Monthly sales are compiled by the World Semiconductor Trade Statistics (WSTS) organization and represent a three-month moving average. SIA represents 99% of the U.S. semiconductor industry by revenue and nearly two-thirds of non-U.S. chip firms.

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Regionally, year-to-year sales increased slightly in February in Japan (1.2%), but decreased in Europe (-0.9%), the Americas (-14.8%), Asia Pacific/All Other (-22.1%), and China (-34.2%). Month-to-month sales were down across all regions: Europe (-0.3%), Japan (-0.3%), Asia Pacific/All Other (-3.6%), the Americas (-5.3%), and China (-5.9%).

Souce: https://www.semiconductors.org/global-semiconductor-sales-decrease-4-month-to-month-in-february/

The bottleneck for semiconductors seems to have certainly passed, and I would expect to see the balance sheet for semiconductor and chip manufacturers to begin contracting.

Moving onto war and legislative pressures, I believe that this industry has tremendous exposure to China & Taiwan...

TSMC is the largest producer of semiconductors, virtually all other chip manufacturers rely on TSMC to produce their semiconductors. Additionally, outside of TSMC, many chip manufacturers rely on China for at least part of their chip manufacturing or assembly as well.

I believe that the growing conflict between China and Taiwan may be approaching a tipping point.

Although tensions have been high between Taiwan and China for sometime, a recent Quiver Quant Instagram reel outlines some suspicious trading behavior from Senator Tommy Tuberville as well as Warren Buffet regarding TSMC.

Reel: https://www.instagram.com/reel/Cq89p-1ggyM/?utm_source=ig_web_copy_link

Yahoo Finance Article on Buffet TSM Sale: https://finance.yahoo.com/news/warren-buffett-says-unusually-quick-002444050.html

Quiver Quant Page on TSM Trades: https://www.quiverquant.com/dashboard/TSM/

I believe that this conflict will create a huge supply chain issues for chip manufacturers. I believe it will be a delayed issue, meaning that we won't see the issue manifest for at least a quarter or two on earnings, and I would not be surprised if their first earnings following the conflict is actually stronger, but their forward guidance becomes incredibly poor.

Adding to the bottleneck they may be experiencing with semiconductors, I believe that OPECs decision to reduce oil production will also manifest itself as additional operating costs for the chip manufacturers. The cost to import parts will increase and henceforth their operating cost as well.

Here in the U.S, I believe this will be a stark contrast for us month to month. The government has been able to artificially suppress crude oil prices by dipping into the the national reserve, however, this is not sustainable long term. Once this stops, we'll see a big jump from moderate to high inflation in a matter of days and this will likely shock our economy quite a bit.

https://www.reuters.com/business/energy/sarabia-other-opec-producers-announce-voluntary-oil-output-cuts-2023-04-02/

Overvaluation...

I'm specifically taking aim at NVDA. They have a book value of approximately $8.96 but closed the trading day on 4/14/23 at $267.58

That is 29.86x their book value. YTD their stock price has risen 80.18% while their actual book value has dropped from $10.62 to $8.96 YOY from Q4 of 2021 to Q4 of 2022.

To contrast, TSM's price-to-book ratio is 4.72 as of 4/14/23.

AMD's P2B value is 2.70, and just for fun, TSLA's is 13.09

Obviously when we look at the actual price of a stock, we understand that a large degree of a stock's price is speculation. I'm arguing that the speculation in NVDA's stock price is out of control, and that at some point it will return to a more reasonable price-to-book ratio.

I believe in this case, the conflict between Taiwan and China will be the catalyst that will accelerate NVDA's waterfall down into a more reasonable price point.

Positions

$TSM Short

$YANG Long

$SOXS Long

$UVXY Long

I do believe that after this bubble bursts, we're going to form another bubble, so I'll be looking to reverse my positions at some point.

Specifically I will be looking at INTC and MSFT to lead the next bubble in this sector given their foray into semiconductor manufacturing.