Why GlobalFoundries, Micron Technology and Applied Materials Soared Today

What happened

Shares of companies focused on semiconductors GlobalFoundries (GFS 11.89%), Micron Technology (MU 4.37%)and Applied materials (AMAT 4.60%) were up today, up 12%, 4.3% and 4.7%, respectively, as of 2:31 p.m. ET.

There was no company-specific news today for any of these stocks, although there was some earlier in the week, particularly for GlobalFoundries. However, broader optimism about the path of inflation, the passage of the CHIPS Act earlier this week, and the likely passage today by the House of the Cut Inflation Act could all contribute to the rise in these stocks.

Additionally, an article on Appleit is (AAPL 2.14%) Last night’s iPhone production plans may have eased some fears around the battered chip sector.

So what

Along with many clean energy stocks, many semiconductor stocks are up today in anticipation of the House passing the Cut Inflation Act, which provides subsidies to consumers for the purchase of eligible new or used electric vehicles (EVs).

This could be because electric vehicles require significantly more semiconductors than traditional internal combustion vehicles. According to GlobalFoundries’ recent presentation at Capital Markets Day, Level 2 autonomous electric vehicles require three times the semiconductors of traditional cars, while Level 4 autonomous electric vehicles require six times as much. With only 5% EV penetration in the US and 8% global penetration, it is possible that EVs will see a tipping point towards mass adoption with the help of this bill.

On that note, GlobalFoundries produces many chips on mature edge nodes that are used in electric vehicles, such as power semiconductors. Earlier this week, it announced an extension of its long-term supply agreement with Qualcommwhich notably includes Qualcomm’s autochip platform.

The CHIPS Act, passed earlier this week, should also help GlobalFoundries. On the heels of GlobalFoundries’ earnings beat on Tuesday and its Financial Markets Day for analysts on Thursday, Baird analyst Tristan Guerra reiterated the stock’s outperformance rating on GlobalFoundries, while maintaining its price target at 100. $, about 50% more than today’s price.

Guerra believes the CHIPS Act will allow the US smelter to increase its gross margin beyond its long-term goal. In this week’s Capital Markets presentation, GlobalFoundries outlined the ambition for the current gross margin of 27% to grow to 40% over time, while also forecasting annual revenue growth of 8% to 12%. .

Memory producer Micron also made two big announcements. First, the company was down again for its current quarter as the PC pandemic hangover continues to weigh on its near-term results. Citing macro concerns from customers, management noted widening inventory adjustments that are expected to take a few quarters to materialize.

Although Micron stumbled upon this news, it ended the week up. This could be due to today’s optimism on the IRA, as well as the signing of the CHIPS Act this week. Following the CHIPS Act, Micron announced a $40 billion investment in state-of-the-art memory manufacturing in the United States, which will roll out over the decade.

Micron is also very sensitive to the broader economy, as its memory chips look like commodities, with prices fluctuating based on supply and demand. Since markets received positive news on the inflation front on Wednesday, with month-on-month inflation at zero for the first time in a long time, many economically sensitive stocks have surged higher on a renewed optimism for a “soft landing”.

Meanwhile, all these new manufacturing subsidies should go a long way to boost Applied Materials, which is the largest semiconductor equipment stock by revenue. Although the stock fell earlier this year on fears of an economic slowdown, the passage of the CHIPS Act could lead to redundant investment in chipmaking in the near term, perhaps mitigating any potential downturn – if it ever materialized.

Finally, as the icing on the cake of a momentous week, Bloomberg reported that Apple had asked its suppliers to build at least 90 million iPhone 14 units this year. This figure would be roughly the same as last year and appeared to provide a data point that demand for high-end smartphones remains resilient, despite fears of steep declines that have plagued low-end phone brands this year. . Given the size and importance of Apple, chipmakers also tend to react to Apple news, for better or for worse.

Now what

Semiconductor stocks got off to a rocky start in 2022 in anticipation of the semiconductor downturn that seems to be happening; however, given the anticipation of this cyclical sector, the combination of waning inflationary pressures and significant US government manufacturing subsidies this week bodes well for better times.

A rule of semiconductor investing: If you’re waiting for the crisis to sell out or buy concrete positive financial stocks, chances are you’ve missed a big move in stocks, in both meaning.

Billy Duberstein has positions in Apple, Applied Materials and Micron Technology and has the following options: January 2023 $160 short calls on Micron Technology and January 2023 $210 short calls on Apple. Its clients may hold shares of the companies mentioned. The Motley Fool holds positions and recommends Apple, Applied Materials and Qualcomm. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.

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