Company Reports

After GlobalFoundries announced additional expansion plans and its eligibility to receive a combined $2.1 billion in U.S. state and federal funding under the Chips and Science Act, we have lifted our fair value estimate to $48 a share from $45. We expect gross margin improvement to be limited as competitors are also motivated to add capacity through subsidy support and an optimistic semiconductor outlook. We therefore believe that GlobalFoundries’ shares are currently fairly valued.

We maintain our fair value estimate for GlobalFoundries, or GF, at $45 after factoring soft first-quarter guidance in our 2024 forecast and small adjustments thereafter. Shares look overvalued as we view the market has overestimated GF’s ability to defend pricing through single-sourced products. We view recent developments in the foundry sector as posing incremental challenges to GF’s long-term goal for 40% gross margin, as incremental capacity outside of Taiwan by competitors like TSMC would dampen GF’s proposition as a major non-Asian foundry. The main upside risks to our fair value estimate are larger-than-expected Chips and Science Act subsidies and escalating geopolitical tensions in East Asia.

GlobalFoundries is vying for third place among contract semiconductor manufacturers, or foundries. It focuses on specialty products that perform narrower sets of tasks compared with the most advanced processors. These tasks range from storing small bits of data for very long periods to regulating electricity flows. GF has relinquished development of cutting-edge chips like smartphone and data center processors owing to financial, scale, and personnel constraints. Many of GF’s offerings are commoditized as they are fabricated on process technologies first debuted over a decade ago. Customers can obtain close substitutes at other chipmakers barring major shortages, which limits GF’s pricing power.

We are resuming coverage of GlobalFoundries with a $45 fair value estimate, no-moat rating, Standard Capital Allocation Rating, and High Morningstar Uncertainty Rating. We think the shares are expensive as the market may be too optimistic about GF’s ability to reach its long-term gross margin target of 40%. Unlike bigger competitors, GF’s lack of cutting-edge process technology makes it susceptible to demand and supply shocks, leading to our view that the firm is unlikely to consistently attain excess returns on invested capital versus weighted average cost of capital. We forecast GF to achieve a 5.6% sales compound annual growth rate from 2022 to 2027 by spending an average of $1.5 billion a year on new sites globally. A key upside risk is higher geopolitical tensions that prompt customers to reallocate from East Asia to GF.

GlobalFoundries is vying for third place among contract semiconductor manufacturers, or foundries. It focuses on specialty products that perform narrower sets of tasks compared with the most advanced processors. These tasks range from storing small bits of data for very long periods to regulating electricity flows. GF has relinquished development of cutting-edge chips like smartphone and data center processors owing to financial, scale, and personnel constraints. Many of GF’s offerings are commoditized as they are fabricated on process technologies first debuted over a decade ago. Customers can obtain close substitutes at other chipmakers barring major shortages, which limits GF’s pricing power.

We are placing GlobalFoundries under review pending a transfer of coverage. We expect to resume coverage by the end of 2023.

GlobalFoundries is the world's fourth-largest dedicated contract chip manufacturer, or foundry. It creates integrated circuits for customers based on their proprietary integrated circuit designs. GlobalFoundries has benefited from the transition by most semiconductor companies from integrated device manufacturers to fabless business models. While we expect the firm to enjoy solid growth, we do not believe it has an economic moat.

We are placing GlobalFoundries under review temporarily, and we expect to resume coverage in the near future.

No-moat GlobalFoundries reported first-quarter results consistent with our expectations. While management reiterated its view that the first quarter would be the low point of revenue for 2023, it now anticipates a slower recovery to normalized inventory and demand levels than previously expected. We view this more conservative outlook as more in line with our estimates, as we have been skeptical of a sharp recovery in demand in the second half of 2023 given assorted macroeconomic headwinds. Although we now expect GlobalFoundries’ revenue to decline about 4% in 2023 (versus up modestly previously), we model a stronger recovery in 2024 and thereafter. Shares fell nearly 7% following the release of the results and now trade close to our unchanged fair value estimate of $55.

GlobalFoundries reported fourth-quarter results slightly ahead of our expectations. Despite macroeconomic uncertainty and elevated inventories at many customers, the firm has executed well to improve its profitability, secure long-term agreements with customers, and diversify its end-market exposure with high-quality offerings. We like that 40% of the firm’s customers are under long-term agreements (up from 38% last quarter), with a total value over $27.5 billion, which offers visibility into future revenue growth and increases customer switching costs as more of GlobalFoundries’ sales are single-source revenue (chips that can only be made at GlobalFoundries’ fabs). Specifically, in 2022 about two thirds of the firm’s revenue was single-source.

GlobalFoundries is the world's fourth-largest dedicated contract chip manufacturer, or foundry. It creates integrated circuits for customers based on their proprietary integrated circuit designs. GlobalFoundries has benefited from the transition by most semiconductor companies from integrated device manufacturers to fabless business models. While we expect the firm to enjoy solid growth, we do not believe it has an economic moat.

GlobalFoundries reported third-quarter results slightly ahead of management’s guidance and our expectations. We like that 38% of the firm’s customers are under long-term agreements, with a total value over $27 billion, which offers visibility into future revenue growth and increases customer switching costs. Management expects macroeconomic and geopolitical uncertainty to negatively impact the firm’s sales in the first half of 2023. We suspect the negative impact could last longer, though we still expect GlobalFoundries to grow its top line in 2023 thanks to new design-wins and improved wafer pricing. We are maintaining our $45 fair value estimate, and we think shares of no-moat GlobalFoundries look overvalued, as we believe current market prices imply stronger growth than our expectations.

On Aug. 10, GlobalFoundries held its first capital markets day at which management outlined the firm’s long-term strategy and outlook. While we like the firm’s increasing focus on differentiated technologies, including single-source products (chips that cannot be made elsewhere without significant redesigns), we do not believe the firm has an economic moat. GlobalFoundries gets about half of its revenue from the smartphone space, which we expect to be weaker in the near term, though the firm does boast enviable exposure to higher content 5G devices. Longer-term, we anticipate the bulk of GlobalFoundries’ growth to come from the Internet of Things, automotive, and communications infrastructure and data center end markets. The firm has its capacity booked up for both this year and next, but we are concerned with softness in certain chip demand pockets as well as inflationary, geopolitical, and pandemic-related headwinds.

GlobalFoundries reported second-quarter results slightly ahead of management’s guidance and our expectations, thanks to strength in nearly every segment. We like that the firm’s single-source wafer shipments grew 37% year over year, as these products have higher switching costs and average selling prices. Although GlobalFoundries has its capacity booked up for both this year and next, we are concerned with softness in smartphone and PC demand and inflationary, geopolitical, and pandemic-related headwinds. We are maintaining our $45 fair value estimate and we think shares of no-moat GlobalFoundries are overvalued.

GlobalFoundries reported first-quarter results that exceeded management’s guidance and our expectations, thanks to strength in nearly every segment. We like that the firm’s single source wafer shipments grew 48% year over year, as these products have higher switching costs and average selling prices. Although GlobalFoundries has its capacity booked up for both this year and next, we are concerned with softness in smartphone and PC demand as well as inflationary, geopolitical, and pandemic-related headwinds. We are raising our fair value estimate for no-moat GlobalFoundries to $45 per share from $43 per share thanks to the stronger results, but we continue to view shares as overvalued.

GlobalFoundries is the world's fourth-largest dedicated contract chip manufacturer, or foundry. It creates integrated circuits for customers based on their proprietary integrated circuit designs. GlobalFoundries has benefited from the transition by most semiconductor companies from integrated device manufacturers to fabless business models. While we expect the firm to enjoy solid growth, we do not believe it has an economic moat.

We’ve initiated coverage of GlobalFoundries with a $43 fair value estimate, no-moat rating, and Standard capital allocation rating. As a semiconductor foundry, GlobalFoundries is several generations behind leading-edge chipmakers TSMC, Samsung, and Intel in process technology, in our view. Consequently, it is more prone to bouts of pricing pressure caused by oversupply or reduced demand. The company has yet to be profitable on a GAAP basis, and its gross margins are comparable with no-moat foundries such as UMC and SMIC. We expect GlobalFoundries will be unable to maintain excess returns on invested capital over an extended time frame, even amid the ongoing chip shortage that began in 2020.

GlobalFoundries is the world's fourth-largest dedicated contract chip manufacturer, or foundry. It creates integrated circuits for customers based on their proprietary integrated circuit designs. GlobalFoundries has benefited from the transition by most semiconductor companies from integrated device manufacturers to fabless business models. While we expect the firm to enjoy solid growth, we do not believe it has an economic moat.