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The ‘Greatest Risk’ To The ‘GAMMA’ Stocks
Earlier this month, I noted that "concentration risk" in US equities is the highest it's ever been.
There are a number of ways you can measure market dominance, but typically, the discussion revolves around the weight of the FAAMG stocks and their contribution to earnings and revenue growth.
As SocGen's Andrew Lapthorne pointed out, nearly a third of S&P 500 market cap is now held in only nine companies (considering dual listings) and if analysts are correct, those companies will generate
Concentration risk is largely a function of the federal government’s abdication of its anti-trust responsibilities, with plenty of blame to go around (Republican and Democrat). Sooner or later, we will reap what we have sown.
From what I have read, the available supply of chips goes to GAMMA, et al, first. Then, whatever is left over goes to the mid-caps and then to the smaller companies, down the line based upon how large of a customer they are to the chip makers.
This was explicitly stated in several mid-cap September quarterly reports that I read.
So the sales for the largest companies will be the least affected by the chip shortage. Hopefully, the mid-caps get the chips they need sooner rather than later.
I understand this scenario from a business standpoint but how does it fit with auto company shortages. These guys are “midcaps”?
The second level issue with chips is that there are some very simple chips with a singular function (low margin/profit to chipmaker) and some more complicated chips (higher margin/profit to chipmaker).
If a chip manufacturer has to make a choice, they are manufacturing the complex, higher profit chip at the expense of manufacturing the simple, low margin chip. My understanding is that an automobile requires both complex and simple semiconductors.
The same is happening with appliances. The manufacturers are making the higher end (more profitable) appliances instead of the normal range of products, which would include lower end (less profitable) appliances.
Emptynester’s summary was on point, but simplified to the point of obscuring reality. Automakers aren’t buying cutting edge CPUs and GPUs, which is what all the new fabs will be building. The real shortages are in the dull edge chips needed for ordinary computational tasks, which are very low margin chips. The automakers reeled in their contracts when the pandemic hit, and some fabs had to go offline for lack of demand. The demand pickup has been way faster than the fab market could handle and car cos were late to get their orders back in. And, in the end, they are essentially “midcaps” in such a scenario when it comes to their demand for chips. Companies who renege on their contracts for chips aren’t usually the best customers for fabs to consider when demand is hotter than supply. So Emptynester really is right, it’s just not really “midcaps” sensu stricto, and I used too many words to say so.
The Tesla speculation continues to feel overly exuberant. In a different article it was noted that other new EV companies are being bid up because of their legitimately competitive offerings. The major automakers are also building EV’s with the Ford Mustang Mach E being a Model X competitor and the VW ID.4 looking very Model Y-ish. Ford has also invested in a major charging network to compete with Tesla’s. Throw in BBB, which has a plan to build a national charging network, and Tesla seems to be losing one of their competitive advantages. Finally Tesla’s major advantage thus far has been its software, with its autopilot looking less and less reliable as they continue to iterate it, I can see a future where a Ford creates something better. The EV market is sure looking like it’s about to be hyper competitive in the next 3-5 years, which in my opinion does not bode well for Tesla who has enjoyed essentially a monopoly.
It was ever thus- competition will crop up- that is the biggest risk to Tesla shareowners. In fact profits probably rise at Tesla pretty fast but forward valuations shrink faster. There may be more money to be made in Tesla for a couple of years but around 4-5 years from now the competition in EVs will be much stiffer and profit margins and valuations are likely to shrink. Same situation with the other stand alone EV companies.