What happened
Shares of semiconductor foundry GlobalFoundries (GFS +7.49%) were up as much as 13.2% today, before settling into a 7.4% gain as of 12:31 p.m. ET. The gain was all the more impressive considering the stock rose over 9% as well last Friday.
Not one but three factors appear to be behind the massive move. First, last week saw better-than-feared earnings reports from several chip-related and broader technology companies, especially on the lagging-edge nodes in which GlobalFoundries specializes.
Second, the U.S. Congress also passed the CHIPS Act last week, with the Senate passing the bill on Wednesday and House of Representatives passing the bill on Thursday.
Then on Monday, officials said that House Speaker Nancy Pelosi would visit Taiwan. That spurred fears over potential consequences from China for GlobalFoundries' key Taiwan-based rivals Taiwan Semiconductor Manufacturing (TSM +6.75%) and United Microelectronics (UMC +4.36%).
NASDAQ: GFS
Key Data Points
So what
Thanks to the passage of the CHIPS Act, GlobalFoundries will be able to forge ahead with its planned semiconductor factory in Saratoga, New York. While the company was likely to proceed with the new plant anyway, management had previously said the plant would have been delayed without CHIPS Act subsidies. That's because it would have had to wait longer and build up cash in order to fund the new plant. Of note, GlobalFoundries had already proceeded with a $5.7 billion plant in France earlier this month, after the French government proceeded with subsidies earlier than the U.S.
A faster time to construction and subsidies will speed up the time to get the plant up and running, and therefore, generate revenue and cash flows sooner. That could boost GlobalFoundries' intrinsic value due to the time value of money.
While the CHIPS Act was likely a boost last week, today's above-market gains were potentially the result of news confirming Pelosi's visit to Taiwan, despite warnings from China. Of note, China regards Taiwan as a breakaway region, not a fully independent nation, and may see the speaker's visit as a provocation.
Some traders fear a possible invasion of Taiwan by China, which has been a simmering tension for some time. Therefore, those seeing an increased risk of that disastrous scenario could be selling shares of rivals Taiwan Semiconductor Manufacturing and United Microelectronics and buying GlobalFoundries today. Of note, both Taiwanese companies were down more than 2% as of this writing today.
Taiwan Semi just completed a plant in Arizona, but the vast majority of its fabs and manufacturing operations are in Taiwan. While GlobalFoundries has some design centers and regional offices in China, its trusted fabs and manufacturing sites are in the U.S. and Europe.
GlobalFoundries doesn't produce the world's most leading-edge chips, as Taiwan Semi does. Still, Taiwan Semi is so large that it also produces lagging-edge specialty nodes, often used in autos, Internet of Things (IoT) applications, and appliances, which do in fact overlap with GlobalFoundries. So, they are at least competitors in part. Meanwhile, United Microelectronics is more of a direct rival on specialty nodes. Therefore, a theoretical loss of Taiwan to China could spur a big move toward GlobalFoundries' fabs for specialty node manufacturing.
Now what
While risk is always there, the odds of China invading Taiwan in the near term seem rather low; yet if it does, there would be a massive disruption to all types of businesses. While it's uncertain if GlobalFoundries stock would go up in that worst-case scenario, its stock may act somewhat as a hedge, as it wouldn't go down as much as others.
Even after the big two-day rise, GlobalFoundries stock sits well below its 52-week highs of $79.49 reached in March. The stock trades at 25 times this year's earnings estimates, which may seem expensive, given concerns over a potential recession.
However, the take from recent earnings calls shows the chip downturn has thus far been concentrated somewhat in smartphones but especially in PCs -- largely a hangover from the pandemic work-from-home boom. GlobalFoundries only got 2% of revenue from PCs last quarter, and auto and IoT chip demand seems to be resilient -- in fact, in continual undersupply -- at least as of now.
Therefore, GlobalFoundries belongs on investors' radar for exposure to the lagging-edge chip boom and a potential hedge against war in Taiwan. Investors will learn more when the company reports earnings next week, on Aug. 9.
