Stock Market Trouble Doesn’t Always Spell Doom for the Electronic Components Industry

The electronic components industry is the cornerstone of technological innovation, powering everything from consumer electronics to futuristic spacecraft. A significant contributor to the ever-growing global economy, electronic components are crucial to a country’s national security and modernization. After the global semiconductor shortage, governments worldwide have raced to establish domestic supply chains to avoid re-experiencing such severe disruptions.

Over the last several months, the electronic components industry has been slowly crawling out of one of its deepest sales troughs after the steep decline in demand post-semiconductor shortage. Artificial intelligence (AI) has been a surprising savior, helping offset the worst effects of excess inventory by fueling demand for some components, particularly graphic processing units (GPUs) and memory. The latter saw some of the worst drops in 2023, but with the strong demand for high-bandwidth memory (HBM) and enterprise solid-state drives (SSDs), DRAM and NAND flash have been recovering.

However, despite positive financial reports, the electronic components industry has recently felt a dramatic revenue shockwave. Stock performances by some of the industry's most prominent players, such as AI powerhouse Nvidia and foundry leader TSMC, have seen startling drops, raising alarm bells.  

While scary headlines may indicate market trouble on the horizon, stock performance doesn’t always indicate a bad market. In this most recent case, tumbling stocks may illuminate possible future constraints but not a wider, long-lasting trend.  

Stock Performance vs. Market Health

Typically, stock performance fluctuates as a company announces its quarterly and annual financial reports. It is common to see a company's stock price increase if its financial reports show growth quarter-over-quarter (QoQ) or down if the opposite is true. Individual company challenges, such as management decisions and production issues, can affect a company’s stock position, which does not indicate broader market problems.  

So why did stocks across the electronic components market recently tumble? Not because of individual company problems or a market downturn, but unfortunately, an increase in geopolitical volatility.

More specifically, the ongoing chip war between the United States and China. These tensions have led to rising export restrictions on advanced chips, chip manufacturing equipment, and critical raw materials used in semiconductor fabrication.

Part of the sudden drop in stock price is likely due to the announcement of considerations by the U.S. for continued export restrictions on American chipmaking technologies. One of these new restrictions is called the Foreign Direct Product Rules (FDPR), which would allow the U.S. to stop a product from being sold if it uses American technology. This would directly impact companies like ASML and Tokyo Electron. Statements by the former U.S. president regarding Taiwan have only contributed to poor stock performance in the days after this announcement.  

Should the U.S. impose FDPR restrictions, the semiconductor market will be impacted, but probably not to such an extent that it would significantly derail the market’s recovery. The electronic components market has been recovering over the last few months thanks to AI and the returning consumer electronics demand. Analysts forecast that 2H24 will mark a turnaround for the industry before resuming its regular growth pattern in 2025.  

Technological Advancements Are Currently Fueling Demand

Even in the face of restrictions, the electronic components market is moving forward. Artificial intelligence has been one of the primary growth drivers over the last year, and it is being implemented in various sectors, such as smartphones and laptops. After months of declines, market analysts have begun to see a turnaround in mobile demand. This turnaround is partly aided by the upcoming Apple iPhone 16, which will have AI integration.  

Similarly, the dawn of AI laptops has sparked interest among consumers. Statista states, “The PC market is expected to observe rapid growth in the proportion of PCs capable of handling artificial intelligence (AI) directly on the device. The share of AI-capable PCs among total PC shipments is forecast to grow from 19% in 2024 to 60% by 2027.”

2025 will mark a transition within the electronic components industry, as most, if not all, of the remaining excess inventory will be mitigated through the latter half of 2024. Inventory replenishment is expected to occur throughout late Q3 and Q4 as original equipment manufacturers (OEMs), contract manufacturers (CMs), and electronic manufacturing service (EMS) providers prepare for end-of-year product announcements and holiday shopping.  

Thanks to the integration of AI, new advancements in consumer electronics will lead the pack. The proliferation of the Internet of Things (IoT) in industrial settings and smart homes is also helping push toward a more stabilized market. Similarly, after being slightly derailed during the COVID-19 pandemic, 5G expansion continues to roll out, accelerating the demand for electronic components.  

Datacenters, which are necessary to power the computational demands required of AI, will see explosive growth in the coming months, heightening the need for electronic components. This will strain the existing power grid infrastructure, requiring massive reorganization to handle the added demands of AI, electric vehicles (EVs), and 5G networks. This will lead to orders for electronic components to support new systems, helping digest any remaining excess stock and push average selling prices (ASPs) into stability.  

The electronic components industry is poised to see tremendous long-term growth thanks to these new advancements and the increased interest in establishing domestic supply chains. By 2032, the semiconductor industry will be valued around $2,062.59 billion as emerging technologies continue to grow and fuel the market.  

With more government initiatives pushing for semiconductor development, greater investments in electronic component research and development will help keep competition within the market healthy and fast-paced.  

While stock performance can indicate trouble companies should remain aware of, it does not reflect long-term trends for semiconductor performance.  

Market Sentiment Compared to Reality

Media coverage can often prioritize negative aspects and short-term fluctuations, skewing public perception in one direction. Underlying market conditions can be markedly different from sensational headlines. Usually, these short-term shifts can contribute to greater volatility in stock prices as anxious investors get scared. These decisions are not made with long-term industry trends in mind and are often based on a small snapshot rather than a comprehensive market analysis.

The current trouble in the semiconductor industry stock market is mainly due to short-term concerns centered around geopolitical volatility. The electronic components industry has been aware of the growing problem of geopolitical fluctuations and has been addressing this issue since the COVID-19 pandemic. This is part of the reason numerous countries, including India, China, the U.S., and the EU, have passed incentive programs to attract semiconductor talent to their borders.

Original component manufacturers (OCMs), eager to expand their global reach, have likewise been investing in growing their international footprint. This will make the global supply chain more resilient to fluctuations, whether they are geopolitical conflicts or natural disasters.  

All in all, despite the hiccups, the semiconductor industry is on a good upward trajectory. Should the U.S. pass its FDPR restrictions, there will be short-term issues, but OCMs, despite impacts, should recover. Over the last several months, many OCMs have been working on new products that circumvent restrictions that can be sold on the Chinese market, like Nvidia. Similarly, China has been developing its domestic ecosystem of advanced semiconductors by exploring new chip manufacturing technologies.  

However, recent arguments by U.S. firms, such as KLA and Lam Research, might be enough to get the U.S. government to either relax some of the restrictions or stop the passage of such laws altogether.  

The semiconductor industry has dealt with many challenges and emerged stronger. The electronic components market isn’t going anywhere, no matter what comes its way.

Sourceability Can Help You Stay Informed

The recent downturn in the stock market does not accurately reflect the current health of the semiconductor industry. The industry remains strong despite challenges from excess inventory and troublesome geopolitical volatility. It is becoming more resilient thanks to increased investments by governments and OCMs and recovering demand bolstered by AI applications.  

To remain aware of true market changes, one shouldn’t depend on stock performances for accuracy. Advanced market monitoring tools that survey the performance of components are better indicators of rising trends and areas of strain. Sourceability’s market intelligence tool, Datalynq, can help identify risk-prone components, offering alternatives that are more resilient to market changes or politicization.  

By possessing greater transparency, engineers and procurement teams can make more informed decisions quickly and alert managers to possible upcoming chokepoints. No matter the current market, Sourceability can help organizations obtain their much-needed components or sell their excess inventory to thousands of interested buyers. Ready to get started? Contact us here, today.