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Why GlobalFoundries Stock Keeps Soaring

By Rich Smith – Nov 4, 2021 at 4:55PM

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This global semiconductor shortage is paying off nicely for the new chips IPO.

What happened

Shares of contract semiconductors manufacturer GlobalFoundries (GFS -2.78%) climbed 6.2% to close just short of $63 a share Thursday. Since its initial public offering last week, the stock has gone nowhere but up, gaining ground five straight trading sessions.

And it's not done yet.

Glowing semiconductor chip

Image source: Getty Images.

So what

As Agence France-Presse reported yesterday, Arm Holdings chief executive Simon Segars says that the "unprecedented" global semiconductor shortage that is currently plaguing the industry in general -- and automotive manufacturers in particular -- is nowhere near over.  

"We've been in situations before where there has been in some cases over supply, in other cases under supply, but it's never been like it is right now," commented Segars.

A deficit of semiconductors for automotive parts is single-handedly reducing car production this year by an estimated 7.7 million units. That's horrible news for car stocks, and for anyone wanting to buy a car at a reasonable price this year. On the other hand, it could turn out to be great news for GlobalFoundries, which in September promised to double its automotive chip output this year.  

Now what

Twice the production should logically result in twice the windfall profits that semiconductor manufacturers are earning this year. What's more, GlobalFoundries has said it will spend $6 billion this year to expand chip production and keep on capitalizing on the situation as long as it lasts.

How long will that be? According to Arm's CEO, the semiconductor shortage won't end before the end of 2022 -- right around the time that most of GlobalFoundries' new production capacity comes online.

On the one hand, that seems to create a risk that GlobalFoundries' solution to today's chip deficit could end up creating a chip glut two years from now. On the other hand, that's the risk you take when investing in cyclical industries.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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