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I’ve made clear in the past that I’m a fan of fabless semiconductor companies. These companies specialize in design and then go to foundry companies to actually make their products for them. If we want to balance our exposure to this important market, it may be useful to consider the foundries themselves.
Enter GlobalFoundries (NASDAQ:GFS), the foundry company spun off by AMD in 2009. Maintaining strong ties to AMD, they’ve also grown an enviable client list of major companies. 73% of business comes from.
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1. AMD 2.Cirrus Logic 3. Infineon Technologies AG 4. MediaTek 5. NXP Semiconductors N.V. |
6. pSemi 7. Qorvo 8. Qualcomm 9. Samsung 10. Skyworks |
No longer just a small wing of AMD, GlobalFoundries does business with major companies like Qualcomm and Samsung, along with some ubiquitous makers like Cirrus Logic and MediaTek. This means investing in GlobalFoundries gives us exposure to the upside of such companies, which are growing dependent on the foundry. GlobalFoundries says almost any major piece of tech like a phone has some part they made, and with this list, I don’t doubt it.
Growing on its own
No longer married to AMD, GlobalFoundries is investing heavily in growing toward profitability.
|
2019 |
2020 |
2021 |
|
|
Net Revenue |
$5.81 billion |
$4.85 billion |
$6.58 billion |
|
Gross Profit |
($532 million) |
($713 million) |
$1.01 billion |
|
Operating Income |
($1,625 billion) |
($1.656 billion) |
($60 million) |
Source: most recent 20-F
As you can see, they’ve grown such that they’ve pared away almost their entire operating losses. Growth in the semiconductor industry will put revenues about $8 billion according to analysts, and very strong earnings per share as they get into profitability. This is even better considering the cashflow as it’s been.
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2019 |
2020 |
2021 |
|
|
Cash from op. |
$497 million |
$1.0 billion |
$2.839 billion |
|
Cash from investing |
$344 million |
($366 million) |
(1.45 billion) |
|
Cash from financing |
($684 million) |
($733 million) |
$650 million |
|
Net Cash |
$153 million |
($89 million) |
$2.031 billion |
Source: most recent 20-F
Investments and growth have started to pay off with strong cash returns. This will allow GlobalFoundries to keep modernizing, and preparing for a future as an important semiconductor player.
By the Numbers
Paring losses has the most recent yearly EPS for GlobalFoundries at ($0.50). Not ideal, but analysts put this year’s estimate at $2.59 and next year at $2.38. Those would be PE multiples of 21 and 22.7, respectively. Those are not exactly deep-discount PEs, but point to some enviable PEG ratios if the estimates do pan out.
These future earnings, and the aforementioned cash flow, show GlobalFoundries is growing the right way, and is priced reasonably if you trust the estimates.
CHIPs Act
The semiconductor industry has grown important, and the US is keen to invest in domestic suppliers. That’s good news for GlobalFoundries, who are positioned to be a recipient in subsidies in growing their capacity.
This is not all theoretical. Last month, GlobalFoundries secured $30 million in investing for its upgrades in Vermont. This is likely not the last of those types of investments, with Sen. Patrick Leahy (D-VT) eager to go to bat for the company.
As an advanced American company, GlobalFoundries is also in-line for lots of American contracts, as have fabrication done domestically is important for security. This was emphasized for military technology, as a safer alternative to making the devices in China, but security is at least as important in major chips for tech giants like GlobalFoundries do business with, for whom corporate espionage is at least as big of a threat. This gives them a natural customer base.
Risky? Things to keep in mind
When I was in college, some 25 years ago, people were steering students away from semiconductor careers, arguing it was “old tech.” Time and again, industry has shown this to have a long shelf-life, with plenty of room left. GlobalFoundries fits nicely as a niche play for semiconductor businesses going forward. It may not rival the likes of Taiwan Semiconductor, but gives safe exposure with reason to think there is more growth on the way in the next few years.
This all sounds good, but there are a lot of risks to watch for, including falling semiconductor prices and demand, which may come after this long bull market.
GlobalFoundries also offers a wide array of processes to customers. Obviously they try to anticipate what will be in demand and work with big customers, but mistakes are always possible, and could potentially stifle their important growth.
Conclusion
Not every company needs to be the portfolio leader, and there are plenty of ways to diversify into good companies chasing different markets. In this regard, I think GlobalFoundries warrants strong consideration.
Semiconductors are too big of an industry to not be exposed to, and GlobalFoundries is carving out its share of the market.
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