Shares of GlobalFoundries (GFS 0.34%) fell 24.1% in January, according to data from S&P Global Market Intelligence.
Given that GlobalFoundries is one of just a few global pure-play semiconductor foundries, and that we are in a booming period for chip demand, it may be surprising to see the stock sell off so much last month. However, as with everything tech-related, much of the sell-off came down to valuation.
GlobalFoundries stock had gone up a lot since its late-October initial public offering (IPO), so to see some air come out of its sails in January may not have been that surprising. After rising 42% in November amid much enthusiasm for chip-related names, the stock had a relatively flat December before correcting last month.
Fears over inflation and significantly higher interest rates have pushed down the value investors are willing to pay for earnings well out into the future. Even after its January plunge, GlobalFoundries shares still trade roughly $7 above its $47 IPO price, and the stock still goes for about 31 times this year's earnings estimates. So it wasn't exactly "cheap" coming into January.
There wasn't much in the way of company-specific news for GlobalFoundries last month. However, anything having to do with the broader semiconductor sector could affect the stock. GlobalFoundries has been at the epicenter of the chip shortage, as it concentrates on lagging-edge chips used in many automotive and Internet of Things applications. While leading-edge chips get much of the attention, a lot of today's booming demand and shortages are actually coming from these lagging-edge chips.
In the most recently reported third quarter, GlobalFoundries revenue surged 56% year over year and margins expanded. However, the semiconductor industry has historically been quite cyclical, so some investors may be getting nervous we are getting toward the end of the boom, so to speak. As a newly public company, investors may not be quite as comfortable with GlobalFoundries as they are with more well-established foundry and chip companies.
Additionally, Intel announced a new manufacturing site in Ohio in January, aggressively doubling down on its ambitions to become a foundry for third parties. It's possible some may see Intel's huge investment in the U.S. as a competitive threat to GlobalFoundries and others, although the new Ohio plant won't come online until at least 2025.
While the semiconductor industry has historically been cyclical, some suspect we are entering a period in which the chip sector fluctuates less than in the past, given the increased diversity of chip applications, from data centers to 5G to automotive and "smart" everything.
If that's true, GlobalFoundries could still be a buy. However, the stock is currently a bit more expensive than even Taiwan Semiconductor Manufacturing, which has the lead in leading-edge chip manufacturing capabilities. It's possible GlobalFoundries could outgrow TSM in the next year or so given its smaller size and the need for lagging-edge chips. Still, it's a bit hard to buy GlobalFoundries at a higher valuation than TSM, which has a technology lead.
In any case, if the broader chip industry is less cyclical, both are buys; however, if the Federal Reserve hikes rates too fast and pushes the economy into recession, both stocks will decline. So, the macroeconomic picture and cyclicality of the overall industry will likely drive the price for both stocks this year.
The company reports fourth-quarter earnings tomorrow, Feb. 8.