Are Shares of Chip Maker GlobalFoundries (GFS) a Buy After Recent IPO?

The semiconductor industry has hit a major headwind in the last several months as a global shortage of microchips has backed many of the industry’s leading manufacturers into a corner. As these companies struggle to keep up with demand there has been one that has found the current market environment suitable for an IPO.

In this article, I will analyze GlobalFoundries (GFS) to find out if its shares deserve a place in your portfolio.

GFS is a provider of semiconductor manufacturing services and one of the world’s leading semiconductor foundries, delivering feature-rich process technology solutions for manufacturing chip designs used in the most critical and in-demand applications. GFS serves a range of customers, including the global leaders in Integrated Circuit (IC) design, and provides optimized solutions for the function, performance, and power requirements of critical applications. GFS’ core technology portfolio includes a range of differentiated technology platforms, including RF Silicon-on-Insulator (SOI) solutions, Fin Field-Effect Transistor (FinFET), Metal-Oxide-Semiconductor (CMOS), Fully Depleted SOI (FDXTM), Silicon Germanium (SiGe) products, and Silicon Photonics (SiPh).

Since its listing last week, GFS’ shares have performed well, gaining 25.5% and outperforming most of its peers. 

Chart from Stock News

GFS’ global footprint, secured supply chains, and rapid semiconductor capacity expansion are positive stock catalysts

GFS is operating in a tough environment that is likely to continue to grow at a rapid pace in the foreseeable future as the world’s need for better semiconductor technology is never ending. Meanwhile, the golden age of semiconductors is well underway as the world embraces new technologies including the internet of things, 5G, cloud computing, artificial intelligence, and vehicle electrification.

While GFS is trailing Taiwan Semiconductor on leading-edge microchips, GFS serves the market for less advanced chips, which are critical for an increasing number of industries. Nevertheless, the chip market is very concentrated and it is estimated that approximately 77% of semiconductors revenue in 2020 was from chips manufactured in Taiwan or China. This geographical concentration is an opportunity for GFS, which can leverage its global manufacturing footprint and secured supply chains to deliver its critical semiconductors to its customers.

To take advantage of this, GFS is racing to add capacity and is expected to use the proceeds of the IPO, representing $2.6b, to help fund future investment in manufacturing capacity. While this may take a few years before completion, GFS has a significant number of single-sourced products and customer supply agreements that GFS sold out of semiconductor chip capacity through 2023. This provides a high degree of revenue and earnings visibility for the company, which should satisfy current and future shareholders.

GFS’ is unprofitable and expensive compared to peers

The semiconductor specialist’s revenues have declined in the last three years, reaching $4.8b in 2020, compared to $5.8b in the previous period. For the first six months of 2021, GFS reported net sales of $3.03b, up 12.6% year-on-year, and a gross profit of $330m compared to a gross loss of $361m in the first half of 2020. More interestingly, according to GFS’ filing, this was the company’s first 6-month positive gross profit of the past three years, which does not bode well for GFS.

On the other hand, GFS reported net losses in each of the past three years. In 2020, the company lost $1.35b, and for the first six months of this year it incurred a loss of $301m, compared to $534m in 2020. This can be mainly explained by the company’s high costs which topped net revenues in the past years. In 2020, GFS’ costs of revenues were established at $5.56b, whereas net sales reached only $4.85b.

While management expects an improvement of its margins once GFS adds new capacity, the financials of the semiconductor company are in poor shape, as the company is struggling to deliver a profit in this long-lasting tight semiconductor market.

In contrast, the financial structure of GFS is sound as the company raised more than $2.6b during its IPO and had long-term debt of $2.17b and $804.6m in cash at the end of June 2020.

In terms of valuation, GFS’ market capitalization stands at 31.38b, corresponding to a EV/EBITDA of 33.3x and a P/B of 4.57x, in comparison with Intel Corp. (INTC) which trades respectively at 5.64x and 2.21x.

Bottom line

GFS stock performance has seen bullish momentum since its IPO last week. The company is set to increase capacity to respond to the bottleneck in the semiconductor market, which is conducive for its stock returns. 

However, the financials of the company have been trailing due to its high costs that consistently deteriorated its bottom line over the last three years. Besides, GFS valuation is stretched compared to peers and for the moment, most of GFS price action seems to be driven by speculative buying. 

Given these elements, I am bearish on GFS and expect a correction of the stock in the near term.