There is one important factor that nobody in the popular press is mentioning. Few analysts in the financial industry are starting to point it out.

And that is that semiconductor manufacturing has been chronically and almost criminally underinvested. The coronavirus pandemic was just a triggering event that brought the whole house of cards down.

The thinking in the financial world for the past 10-20 years has been that software is the hot, growing license to print money industry and actually manufacturing chips is a dirty, competitive, low margin, low return on capital industry best left to the Asians. And of the actual chip manufacturers the ones to be most favored were the ones making digital chips and the ones making analog and power semiconductors were the dirtiest most disliked commodity like companies.

Even within the semiconductor world, the financial world heaped money on fabless semiconductor companies like stock market darling Nvidia and did not give much respect to the companies that owned the fabs and made the chips. And even less respect was paid to the ones that made power and analog chips.

Guess where the biggest shortage is now. In power and analog. Also, in packaging, another field that was considered unsexy, low margin and too competitive to bother with.

Everybody talked about how software is eating the world and heaped massive amounts of capital on software companies but they kind of neglected the important role of semiconductors. And even when they talked about semiconductors they talked about the "important" ones, the "brains" of the computer, the cpus and the graphics chips.

So while software companies (especially SAAS ones) would have license to lose large amounts of money and still have receive endless streams of capital, companies that manufacture chips would be judged severely by the market on profitability and free cash flow. This is especially true for analog and power semi manufacturers.

Free cash flow is a very dangerous metric for a growing industry. Capital spending gets subtracted from cash flow to arrive at free cash flow, which means that if a CEO is judged by free cash flow, he will try to minimize capital spending. That of course will hurt future growth.

I have been investing in analog and power semiconductor companies for many years now, and the CEOs of all these companies knew that a jump in demand was coming. But they all wanted to keep their jobs so they all talked about how they will grow their revenues by minimizing capital outflows etc. If they were cheered by the market for having cash outflows of the type many SAAS darlings have, we would be swimming in semiconductors right now.

For example, if some one wants to do some further reading, check out old investor presentations of Texas Instruments. By old I mean a couple of years ago, before coronavirus. Probably the largest power and analog semiconductor manufacturer in the world. Their entire sales pitch to investors was about free cash flow and capital return to shareholders. That is great for many types of shareholders, but this is not something a high growth company should be doing. Needless to say now they are swamped by demand and do not have production capacity anywhere near to what demand is.

There is another peculiar quality of semiconductors. They are easy to store and they do not go bad after taking some minimal precautions in storage. This means that any rumor of a shortage and price increases causes everybody that uses semis to go out and buy out everything the suppliers will let them buy.

So there is a very unstable situation. A- there is a shortage and B - even the possibility of a shortage causes hoarding behavior that makes the shortage worse.

That already unstable situation existed before coronavirus. And then coronavirus came. And it triggered a heightened demand for semiconductors. And that triggered a snowball effect of hoarding and higher prices, more hoarding, etc.

The solution is that prices should go up (already happening). Stock prices of semiconductor manufactures should go up. And here I mean actual manufacturers, not fabless chip designers. This should happen especially for analog and power semiconductors where the biggest demand and the biggest underinvestment lies. This has not happened as much as it needs to. Higher stock prices should cause more money to go to the fab business and that should eventually result in the necessary growth in semiconductor manufacturing.

All of this will take time. And meanwhile there will be a lot of hoarding. There may also be occasional panics where the hoarders dump a lot of hoarded inventory thinking prices are going down, cause prices to go down and later discover that prices are shooting back up again after their inventory gets used up.

But in the end hopefully we should end up in a world where (1) there is much more investment in semiconductors and (2) we eventually get all the benefits of the wealthy, high production, environmentally sustainable, all electric future we have been dreaming of.