The bear market of 2022 bludgeoned technology stocks, but it also brought an end to the chip shortage for many markets -- at exactly the wrong time for investors. Supply of high-end chips for smartphones, PCs, and some data center components started to loosen up, just as consumer demand for electronic devices started to wane after two years of early-pandemic spending sprees.
However, the chip shortage has continued for mature-node semiconductors (chips that are no longer at the cutting edge of computing and manufacturing technology). The U.S. CHIPS and Science Act is now accepting applications from chip manufacturers, which could help bring relief to companies that use mature-node semiconductors in the coming years.
Does that make GlobalFoundries (GFS +0.72%), a leader in this type of chipmaking, a buy right now?
NASDAQ: GFS
Key Data Points
Big country for old chips
GlobalFoundries produces integrated circuits on silicon wafers, round disks that eventually get chopped up into chips and packaged into computing and electronic systems. GlobalFoundries used to be part of AMD just over a decade ago -- before AMD decided to solely focus on chip design, leaving GlobalFoundries to pursue its own independent fate. The company debuted as a public concern when it IPO'd in late 2021.
Back in 2018, GlobalFoundries decided to stop duking it out in the most advanced (and often most lucrative) chipmaking business with the likes of Taiwan Semiconductor Manufacturing. Instead, it shifted its focus entirely to "mature node" manufacturing. These older chips are frequently used in mobile devices in connectivity, power management, and display applications.
Mature node semiconductors are also used in tried-and-true devices often favored by industrial markets (like automotive and manufacturing). Here, reliability and replaceability are of greater import than ultra-high-performance computing capability.
It's these mature nodes that have remained in short supply as of late, even as more advanced semiconductor shortages have given way to a cyclical downturn. This is especially true in the auto market as vehicle electrification and advanced driver-assist systems require exponentially more silicon to be crammed into each car.
Given that mature semiconductors fetch fewer dollars on the market and tend to decrease in value over time before eventually finding a low-price floor, many chipmakers have been reluctant to invest in increasing their output without some firm commitments from customers. That's why GlobalFoundries' recently announced deal with General Motors (GM 1.57%) is exciting, since the automaker is seeing the wisdom in securing a long-term supply agreement from a leading chipmaker. But more can be done to help grease the gears here.
That's where the CHIPS Act comes in. The initial and likely largest funding round (out of $52 billion in total earmarked for the semiconductor industry) is now open for applicants as of the beginning of March 2023, and it's focused on expanding chip manufacturing in the U.S. This includes government funding for mature nodes, like what GlobalFoundries is focused on, making it a possible winner from this legislation.
Is GlobalFoundries stock a buy?
GlobalFoundries is coming off a couple of pretty solid years of growth thanks to the chip shortage. Revenue and profitability are both up big, and the company is retooling to support its own long-term growth initiatives as well as general growth of the semiconductor market overall.
Data by YCharts.
Nevertheless, GlobalFoundries is cautious about the first half of 2023. Though the company's wafer production capacity remains fully booked in some areas for the year ahead, it did some cost cutting (including layoffs) recently to prep for what could be a turbulent 2023. If some economists are right about a recession ahead, it could be especially hard on manufacturing businesses, and GlobalFoundries isn't immune.
Additionally, at some point, the chip shortage will come to an end for mature semiconductor nodes, just as it has in other areas of the market. When it does, that could cause an ease in pricing for GlobalFoundries' wafers -- resulting in a cooling-off of profit margins.
Indeed, at the midpoint of guidance for Q1 2023, management is predicting revenue will tumble 5.7% year over year although the operating profit margin is expected to rise to about 14% compared with 11.6% in Q1 2022.
However, as well-positioned as GlobalFoundries may be for an expected downturn, it seems that growth and profit margin expansion are already priced in at this point. The stock currently trades for nearly 26 times trailing-12-month earnings and 21 times expected one-year forward earnings.
And as CHIPS Act funding starts to filter into the industry, GlobalFoundries will have competition in the wafer-making business. For a company expected to grow at a high-single-digit to low-teens percentage over time, the shares look a bit pricey to me at the moment.
If you're looking for a solid slow-but-steady growth and dividend tech stock, I think Texas Instruments (TXN +0.31%) -- which makes its own wafers in-house and is also expanding with help from the CHIPS Act -- or top chip-equipment company Applied Materials (AMAT +1.05%) both look more compelling at this juncture.
