What happened
Semiconductor stocks, which have been under pressure the past several days, bounced back in a big way Tuesday afternoon.
As of 1:15 p.m. ET, shares of Nvidia (NASDAQ: NVDA) are up 4.3%, Advanced Micro Devices (NASDAQ: AMD) is up 5.6%, and Micron (NASDAQ: MU) rounds out the list with a 5.7% gain.
Image source: Getty Images.
So what
Why are semiconductor stocks going up? In part, I suspect we're seeing the effects of pent-up buying pressure here -- a relief rally. After all, Micron shares shed 17% of their value over the past three weeks. Nvidia is down 16% over the same period, and even AMD -- a relative outperformer -- is off 7%.
As semi stocks got cheaper and cheaper, it made sense that at some point, folks were going to start buying again. There's also a positive catalyst of sorts that may have ignited today's rally. To wit, as the situation in Ukraine worsens, multiple news outlets have been pointing out the potential deleterious effects that the crisis in Eastern Europe might have on global semiconductor production.
Case in point: Just yesterday, news agency Euractiv noted how "the production of neon, palladium, and C4F6, three materials [that are] vital to semiconductor processing and irreplaceable for microchips ... could be impacted by the situation." Neon, in particular, which is used in laser-engraving pathways on microchips, comes largely from Russia (where it's produced) by way of Ukraine (where it's purified) for sale to semiconductor companies abroad. Now these supply chains are being disrupted and, as Euractiv says, this is going to exacerbate a "semiconductor supply chain is already strained due to the increase in chip demand."
Palladium supplies are also a concern, as Russia produces 37% of global palladium.
Now what
For the time being, Euractiv notes that semiconductor companies don't seem worried about this. Europe's STMicroelectronics, for example, said that "as of today, none of our suppliers had reported any potential impact" from the conflict on raw material supplies. But Euractiv says that could change over the next six to 12 months. In the context of an ongoing global semiconductor shortage, this is one more thing to worry about, and one more reason to believe that the shortage is a problem that could last longer than anticipated.
Now what does this mean for investors? Simply put, the laws of economics indicate that when supply is low but demand is constant or rising, prices tend to go high. That implies wider profit margins for semiconductor companies such as Nvidia, Micron, and AMD, and thus higher profits -- if, that is, they can produce enough to take advantage of the constrained supply of microchips.
At 14 times earnings, right now Micron stock looks like the cheapest way to take advantage of this latest development in the semiconductor industry.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool owns and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
