Shares of semiconductor-focused companies $GLOBALFOUNDRIES Inc.(GFS)$(GFS 11.89%), $Micron Technology(MU)$ (MU 4.37%), and $Applied Materials(AMAT)$(AMAT 4.60%) were roaring higher today, up 12%, 4.3%, and 4.7%, respectively, as of 2:31 p.m. ET.
There wasn't any company-specific news today for any of these stocks, although there was earlier in the week, especially for GlobalFoundries. However, broader optimism over the path of inflation, the passage of the CHIPS Act earlier this week, and today's likely passage by the House of the Inflation Reduction Act could all be helping these stocks move higher.
Additionally, an article on $Apple(AAPL)$ (AAPL 2.14%) iPhone production plans last night may have eased some fears around the beaten-down chip sector.
So what
In conjunction with many clean energy stocks, many semiconductor stocks are on the rise today in anticipation of the House passing the Inflation Reduction Act, which provides subsidies to consumers to purchase new or used qualifying electric vehicles (EVs).
That could be because electric vehicles require vastly more semiconductor content than traditional internal combustion vehicles. According to GlobalFoundries' recent Capital Markets Day presentation, Level 2 autonomous EVs require three times the semiconductor content of traditional cars, while Level 4 autonomous EVs require six times the amount. With only 5% EV penetration in the U.S. and 8% global penetration, it's possible EVs could see a tipping point into mass adoption with the help of this bill.
On that note, GlobalFoundries produces lots of chips on mature lagging-edge nodes that are used in EVs, such as power semiconductors. Earlier this week, it announced an extension of its long-term supply agreement with Qualcomm, which notably includes Qualcomm's auto chip platform.
The CHIPS Act, passed earlier this week, should also help GlobalFoundries. On the heels of GlobalFoundries' earnings beat on Tuesday and its Capital Markets Day for analysts on Thursday, Baird analyst Tristan Guerra reiterated the stock's outperform rating on GlobalFoundries, while keeping its price target at $100, about 50% higher than the price today.
Guerra believes the CHIPS Act will enable the U.S.-based foundry to expand its gross margin beyond its long-term target. In this week's Capital Market presentation, GlobalFoundries outlined an ambition for today's 27% gross margin to expand to 40% over time, while also projecting 8% to 12% annual revenue growth.
Memory-producer Micron also had two big announcements. First, the company guided down again for its current quarter, as the pandemic hangover in PCs continues to bite its near-term results. Citing macroeconomic worries on the part of customers, management noted a broadening of inventory adjustments that should take a couple of quarters to work through.
Although Micron fell on that news, it is ending the week higher. That could be due to today's optimism over the IRA, as well as this week's signing of the CHIPS Act. Following the CHIPS Act, Micron announced a $40 billion investment in leading-edge memory manufacturing in the U.S., which will take place over the course of the decade.
Micron is also highly sensitive to the broader economy, since its memory chips are commodity-like, with prices that fluctuate with supply and demand. Since the markets received some positive news on the inflation front on Wednesday, with month-over-month inflation at zero for the first time in a long time, many economically sensitive stocks blasted higher on renewed optimism for a "soft landing."
Meanwhile, all of these new manufacturing subsidies should go a long way toward boosting Applied Materials, which is the largest semiconductor equipment stock by revenue. Although the stock had fallen to start the year on fears of an economic slowdown, the passage of the CHIPS Act could lead to some redundant chip manufacturing investment in the near term, perhaps softening any potential downturn -- if one even materializes.
Finally, as a cherry on top of a momentous week, Bloomberg reported that Apple has told its suppliers to build at least 90 million iPhone 14 units this year. That figure would be about the same as last year, and seemed to provide a data point that smartphone demand on the high end remains resilient, in spite of fears over big declines that have plagued lower-end phone brands this year. Given Apple's size and prominence, chip companies tend to react to Apple news as well, for good or ill.
Now what
Semiconductor stocks had a brutal start to 2022 in anticipation of the semiconductor downturn that appears to be taking place; however, given how forward-looking this cyclical sector is, the combination of waning inflationary pressures and large manufacturing subsidies from the U.S. government this week is pointing to better times ahead.
One rule of semiconductor investing: If you wait for the slump to sell or concrete positive financials to buy, odds are you will have missed a big move in the stocks, in either direction.
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