GlobalFoundries: Why investors can accumulate this NASDAQ-listed beneficiary of AI theme

The artificial intelligence (AI) wave has undoubtedly arrived and is in its infancy, perhaps similar to the dotcom wave of the late 1990s or early 2000s. The structural changes it will entail in the digital global economy will disproportionately benefit a few other sectors. . Who else. One such sector that could benefit disproportionately is the semiconductor sector, with chips of diverse types at the core of enabling AI-level computing.

At the moment, the listed space in India does not offer much when it comes to capitalizing on opportunities in the semiconductor space. Therefore, investors who are interested in participating in this opportunity will have to look at opportunities in the US markets. The listed group of US semiconductor stocks is a world within a universe – with nearly 100 listed stocks that include chip designers, fabless chip companies, semiconductor equipment makers, test equipment and chip companies, packaging companies and foundries. And so while Nvidia has taken center stage among semiconductor companies over the past month due to booming demand for AI computing chips, the topic of AI will flow through the entire semiconductor ecosystem. At different times, different stocks in the ecosystem will provide good entry opportunities based on valuation and growth prospects.

One company that we believe presents such an opportunity now and would be a beneficiary of the AI ​​theme is Nasdaq-listed GlobalFoundries (stock ticker: GFS). We recommend that investors accumulate shares gradually. Many global semiconductor giants such as Nvidia, Advanced Micro Devices (AMD), Qualcomm, Broadcom, and Micron follow what is known as a fabless business model, whereby they design and sell semiconductor devices/chips, but outsource chip manufacturing. Foundries are the factories where semiconductor chips are made. Manufacturing semiconductor chips is a complex and high-tech process with only a few companies that have managed to establish themselves in this field, GlobalFoundries among them.

Aside from the topic of AI, another structural issue working in GlobalFoundries’ favor is the de-risking of supply chains, with companies and governments working with the clear intent of increasing chip sourcing outside of China/Taiwan. This, along with the burden of China-Taiwan relations, is a factor that works in favor of GlobalFoundries not being exposed to this region. This is one of the reasons why GlobalFoundries is a better investment option compared to Taiwan Semiconductor Manufacturing Company – the global giant in the foundry field. As of 2022, approximately 50 percent of the foundry’s capacity was in Taiwan.

Thus, while GlobalFoundries presents a good objective opportunity, there will also be speed bumps along the way. Number one is the fact that semiconductors are a notoriously cyclical industry. Second, GLOBALFOUNDRIES valuations at a one-year refined price of 25x and EV/EBITDA of 10.8x, while certainly not expensive, aren’t cheap either. Third, the global slowdown could affect performance in the near term. Hence we recommend collecting rather than buying, although the objective chance is strong.

Business and prospects

GlobalFoundries was founded in 2009 when a subsidiary of sovereign wealth fund Mubadala acquired AMD’s manufacturing operations. Since then it has grown exponentially at scale through acquisitions and investing billions of dollars in capacity expansion. It was listed on the stock markets through an IPO in October 2021. Mubadala currently owns about 85 percent of the company.

Today, GlobalFoundries is one of the world’s leading semiconductor companies with a market share of about 7 percent (ranked 3rd). It manufactures feature-rich integrated circuits (chips) that power billions of electronic devices around the world. It serves a wide range of customers, including the world’s leaders in chip design, providing them with solutions optimized for functionality, performance and power requirements for critical semiconductor applications.

As mentioned above, chip manufacturing is a very complex process that involves extensive application of advanced technologies. Foundries add significant value to their customers’ businesses by achieving efficiencies in the manufacturing process through innovation in reducing the size of transistor chips. Industry-wise, one way to measure efficiency is based on nanometers (NM), or chip size. Nanometer chips are less efficient (less power consumption) and faster (computing performance). The advanced technology required for such innovation and many other features in wafers provide an important moat for today’s foundry players. This factor also makes existing customer relationships very strong and enduring. This makes seeing revenue better in the long run.

Within the foundry sector, GlobalFoundries places more emphasis on manufacturing what are known as diffused semiconductors. This represents integrated circuits with multiple functions that serve a broader range of applications catering to a broader range of end markets, compared to traditional integrated circuits that focus on computing-centric verticals.

Currently, there are only five foundries globally – GlobalFoundries, TSMC, Samsung Semiconductor, Semiconductor Manufacturing International Corporation, and United Microelectronics Corporation. Among these, GlobalFoundries is the only player with a global footprint that is not based in China or Taiwan, enabling customers to mitigate geopolitical risks in their supply chain. Last year, the US government passed the Chips+ Act which provides significant funding for semiconductor manufacturing in the US. Globafoundries are well positioned to take advantage of that.

Finance

After reporting strong growth of 23 percent in FY22 to $8.1 billion, GlobalFoundries is expected to post revenue declines of 7.5 percent in FY23. This decline follows two strong years in CY21 and CY22. During the two-year period, revenue rose nearly 70 percent, reflecting strong demand for chips. The decline in CY23 reflects inventory reduction efforts by customers and the industry cycle, which is equal. Despite the revenue trend, the profitability trend is on an upward trajectory. A rebound in the revenue trend is also expected in CY24. However, while the exact path business trends may vary due to multiple moving factors in the global economy, the long-term structural trends bode very positively for GlobalFoundries. This should be reflected in its financial statements over the next 3-5 years. The company also has a strong balance sheet with a modest net cash position.