Blogs -Supply Chain Issues Could Recover In Q3 2022

Supply Chain Issues Could Recover In Q3 2022


April 06, 2022

author

Beth Kindig

Lead Tech Analyst

This article was originally published on Forbes on Apr 1, 2022,01:24pm EDT

Aggregate Inventories Have Recovered but Auto Inventories Remain Under Pressure:

Supply chain issues have been a well-publicized event that has been hard to predict. While there have been improvements in supply chain management since the harsh production halts enforced during the pandemic, semiconductors continue to be a bottleneck in numerous industries, especially automotive.

Furthermore, the semiconductor bottleneck has had a ripple effect and has impacted industries outside of automotive production, such as ad-tech. In fact, ad-tech has been one of the most beaten-down industries due to the supply chain crisis. This is because automotive is a significant category of ad spend, and without inventory to sell, advertising budgets have been slashed. Nonetheless, we expect that this is only a temporary concern and that ad-tech will rebound in 2022 as supply chain issues begin to normalize. We especially look for discounts in tech that stem from a transient yet external issue outside of any individual company’s control.

The I/O Fund team went beyond relying on management commentary and studied the data to better understand the supply chain bottleneck. We found that aggregate inventory levels have generally recovered, but automotive inventories remain under pressure. I/O Fund Financial Analyst Bradley Cipriano notes that an analysis of automotive inventory composition suggests that the supply-chain issues have likely bottomed and will improve going forward.

The I/O Fund chose to be aggressive during the Q4 earnings season between January and March by building ad-tech positions for this reason. We expect that improving inventory trends will lead to a sharp rebound in automotive advertising in the back half of the year, driving topline growth for the ad-tech sector. We discuss why we believe that the supply chain crisis will ease around H2 2022 below.

Supply Chain Management: Aggregate Inventories Have Recovered but Auto Inventories Remain Under Pressure

The pandemic began in early 2020 and resulted in a whipsaw effect that impacted both supply and demand. With governments enforcing strict shelter in place orders, production of goods declined in 2020 but consumers still demanded goods. Government stimulus further bolstered demand and there was less of a contraction in total demand than there otherwise would have been. This dynamic led to the supply shortage that many sectors have been working through.

Since inventories are essentially the difference between production and sales over a period of time, the dynamic of reduced production but increased demand led to a sharp reduction in inventories in 2020 and 2021. As shown below in Chart 1, changes in private inventories, which is a measure of the value of the physical volume of inventories that businesses maintain to support their production, materially declined in Q2 2020. In fact, the $300 billion drawdown in inventories in Q2 2020 was the steepest drawdown in history.

However, while Q2 2020 represented the steepest decline on record, Q4 2021 represented the largest increase on record, as inventory levels bounced back by over $200 billion. This sharp rebound helps highlight that production is catching back up with demand

Chart 1. 50-year Trend of Changes in Private Inventories

Chart shows 50-year Trend of Changes in Private Inventories

Source: U.S. Bureau of Economic Analysis - I/O FUND

Chart shows Three-Year Trend of Changes in Private Inventories

Source: U.S. Bureau of Economic Analysis - I/O FUND

In Chart 3 (below), inventories are also rising relative to sales, suggesting that there has been a build in inventory levels. Furthermore, the metric is above the five-year average, implying that inventories are not tight on a systemic scale.

Chart 3. Five-Year Trend of Private inventories to Final Sales

Chart: Ratio of Private Inventories to Final Sale of Domestic Business

Source: U.S. Bureau of Economic Analysis - I/O FUND

While the above charts highlight that there has been a strong recovery in inventory levels in the economy, it fails to take into account the types of inventories. Specifically, despite the recovery in aggregate inventories, automotive inventories have fallen to all-time lows.

Sign up for I/O Fund's free newsletter with gains of up to 403% - Click here

The below chart from the U.S. Bureau of Economic Analysis shows that auto inventories have declined to a record low and are hovering just above 0. Without much inventory to sell, there is little incentive to spend on advertising, which has negatively impacted ad-tech.

Chart 4. Domestic Auto Inventories

Chart: Domestic Auto Inventories

U.S. Bureau of Economic Analysis - I/O FUND

Chart 5. Domestic Auto Inventories to Sales Ratio

Chart: Domestic Auto Inventories to Sales Ratio

Source: U.S. Bureau of Economic Analysis - I/O FUND

Data from Dentsu’s Global Ad Spend Report highlights how automotive spending is still below 2019 levels. As shown below in Chart 6, global automotive ad spend declined 16% YoY in 2020, and rebounded just 12% in 2021, meaning that global automotive ad spending was still ~6% below its pre-pandemic levels. Since automotive advertisers spend an outsized amount of their budgets on TV ads, ad-tech companies exposed to connected TVs have been especially impacted by the soft recovery in auto ad budgets shown below. As I’ll discuss in more detail below, we believe that automotive ad spending has bottomed and will be a tailwind for ad-tech going forward.

Chart 6. Automotive Global Paid Search Ad Spend

Chart shows the annual change in Global Automotive Ad Spend

Source: Dentsu Global Ad Spend Report - I/O FUND

Curiously, despite the fact that auto inventories are at record lows, automobile manufacturers’ inventories are also at an all-time high. As shown below in Chart 7, total inventory levels in the automotive manufacturing industry have surged throughout 2021 and into 2022.

Chart 7. Automotive Total Inventories

Chart: Automotive Manufacturing Total Inventories

Source: U.S. Census Bureau - I/O FUND

These disparate trends are driven by the well-publicized semiconductor bottleneck. As Chart 7 highlights above, automotive manufacturers have large amounts of nearly completed inventory that is sitting idle until semiconductor supply arrives.

Once the supply of semiconductors arrive, automotive manufacturers should be able to quickly ramp and turn work-in-process inventory into finished goods that can be sold. Moreover, this should also drive demand for advertising as auto manufacturers look to quickly convert their inventory into cash.

Fortunately, there are signs of improvement for supply chain issues, specifically from the automotive industry. For instance, Volkswagen Group’s management team explained on their Q4 call that they “expect semiconductor supply bottlenecks to continue in 2022but gradually improve in the second half of the year” (03/15/22).

General Motors echoed similar sentiment during its Q4 earnings call. GM CEO Mary Barra stated that “by the time we get to third and fourth quarter [of 2022], we're going to be really starting to see the semiconductor constraints diminish” (02/01/22).

However, this sentiment was not shared by all automotive executives. CEO of Stellantis, maker of Dodge RAM, Fiat and other brands, stated on the company’s Q4 call (2/23/22) that the size of the automotive market will be driven by the supply of semiconductors, adding that “hopefully, things will get a little bit better. But we believe it's going to be very slow. It will take time. And 2022 is not going to be from that perspective, the year where we can say we are back to normal. We don't think that will happen”

Looking forward, automotive manufacturers have outsized raw material and work-in-process inventory that will help them quickly ramp production once semiconductor supply improves. The timing of this ramp remains unknown, with some auto executives expecting H2 2022 to be a return to normal, and others forecasting a longer horizon.

Next Tuesday, we will discuss the signs of improvement at key automotive semiconductor suppliers and what this means for ad-tech including one strategic bet the I/O Fund made in ad-tech during the January-March selloff.

Bradley Cipriano, Financial Analyst, CFA, CPA at I/O Fund, contributed to this analysis.

Gains of up to 403% from our Free Newsletter.

Here are sample stock gains from the I/O Fund’s newsletter --- produced weekly and all for free!

+344% on Nvidia

+403% on Bitcoin

+218% on Roku

*as of March 15, 2022

Our newsletter provides an edge in the world’s most valuable industry – technology. Due to the enormous gains from this particular industry, we think it’s essential that every stock investor have a credible source who specializes in tech. Subscribe for Free Weekly Analysis on the Best Tech Stocks.

If you are a more serious investor, we have a premium service that offers lower entries and real-time trade alerts. Sample returns on the premium site include 324% on Zoom, 601% on Nvidia, 445% on Bitcoin, and 4-digits on an alt-coin. The I/O Fund is audited annually to prove it’s one of the best performing Funds on the market with returns that beat Wall Street funds. 

beth

More To Explore

Newsletter

Investing In AI with Beth Kindig: 1-Hour Video Interview

Investing In AI with Beth Kindig: 1-Hour Video Interview

Jordi Visser, CIO and Chairman of Weiss Multi-Strategy Advisers, spoke to Beth Kindig on the Real Vision podcast on March 20th, to dive deep into AI’s potential for explosive economic growth, how to f

April 19, 2024
https://images.prismic.io/bethtechnology/Zh50DEaI3ufuUONy_SemiconductorStocksQ4OverviewAIGainsHeatUp.jpg?auto=format,compress

Semiconductor Stocks Q4 Overview: AI Gains Heat Up

Semiconductor stocks are standout performers so far in 2024, with investor appetite for AI stocks remaining elevated as AI chip leader Nvidia continues its streak of high growth.

April 15, 2024
I/O Fund Catapults to 131% Cumulative Performance Due to Leading AI Allocation

I/O Fund Catapults to 131% Cumulative Performance Due to Leading AI Allocation: Official Press Release

I/O Fund, a tech research site that actively manages a real-time portfolio, announces returns of 57% in 2023 with a cumulative return of 131% since inception. This compares to popular tech ETFs that h

April 03, 2024
The Importance of Verified Returns and Risk Management for Retail Investors

The Importance of Verified Returns and Risk Management for Retail Investors

Last year was a stellar year for investors – in 2023, the Nasdaq 100 rose 54% for its best annual return since 1999, while the S&P 500 gained 24%. The Magnificent 7 were the de facto leaders of this m

March 27, 2024
ARM Building

Arm Stock: AI Chip Favorite Is Overpriced

Arm Holdings is positioned to capitalize on the growing adoption of artificial intelligence (AI) technologies, leveraging its established licensing model and extensive ecosystem to drive future growth

March 26, 2024
Meta Building Picture

Top 3 Ad-Tech Stocks For 2024

Ad spending growth is widely forecast to accelerate in 2024, after a challenging macro environment significantly dented budgets and growth in 2023. The US advertising market is already showing positiv

March 18, 2024
Cybersecurity Apps

Cybersecurity Stocks: CrowdStrike Soars While Palo Alto And Zscaler Fall

This year has led to a split landscape for cybersecurity stocks, with two of cybersecurity leaders up more than 20% YTD while others are negative YTD. In the past, we’ve discussed the resiliency of th

March 10, 2024
The Magnificent 7 Are Falling Like Dominos; Only 3 Remain

The Magnificent 7 Are Falling Like Dominos; Only 3 Remain

The Magnificent 7 of 2023 have now become 2024’s Magnificent 3: Nvidia, Meta and Amazon. Of these, Nvidia’s saw a stellar start to the year as shares have gained nearly 60% YTD due to the GPU leader’s

March 05, 2024
Nvidia Stock Gained $1.5 Trillion To Surpass The FAANGs - Apple Is Next

Nvidia Stock Gained $1.5 Trillion To Surpass The FAANGs - Apple Is Next

Today, Nvidia surpassed a $2 trillion market cap compared to Apple’s $2.8 trillion. The company has surpassed Amazon, Google, Tesla, Meta and Netflix. The only one left standing is Apple and we have 2

February 28, 2024
https://images.prismic.io/bethtechnology/93644c8f-e9e6-4b61-944f-d7ebc957628a_Palantir+Stock+Surges+From+Artificial+Intelligence+Platform.jpg?auto=compress,format

Palantir Stock Surges From Artificial Intelligence Platform

Palantir’s Q4 earnings confirmed an acceleration in its US commercial business as it closed out its first GAAP profitable year. Shares are reflecting the optimism surrounding Palantir’s commercial seg

February 20, 2024
newsletter

Sign up for Analysis on
the Best Tech Stocks

https://bethtechnology.cdn.prismic.io/bethtechnology/e0a8f1ff-95b9-432c-a819-369b491ce051_Logo_Final_Transparent_IOFUND.svg
The I/O Fund specializes in tech growth stocks and offers in-depth research for Premium Members. Investors get access to a transparent portfolio, a forum, webinars, and real-time trade notifications. Sign up for Premium.

We are on social networks


Copyright © 2010 - 2024
Get Free Weekly Analysis on the Best Tech Stocks