/Semiconductor%20chip%20by%20Mykola%20Pokhodzhay%20via%20iStock.jpg)
The semiconductor industry is experiencing a massive surge in demand as artificial intelligence (AI) is booming at a rapid pace. At the same time, chip-making companies are engaged in a competitive race to reach their peak performance.
However, amid the recent market correction, several semiconductor stocks have nosedived, losing significant market value. In particular, Intel (INTC) is facing the toughest time in its history, shedding more than 47% from its mid-July highs. Ugly Q2 earnings led the company to cut dividends and reduce jobs, and a Moody's downgrade is weighing on the stock again today. Meanwhile, rivals are seizing the opportunity to advance their positions, aiming to capitalize on Intel's setbacks by enhancing their market share and technological edge.
Amidst this competitive realignment, GlobalFoundries (GFS) is emerging as a standout niche player in the semiconductor sector. The company operates on a global scale and specializes in providing tailored chip solutions to its customers. Bolstered by strong financials and strategic partnerships, GlobalFoundries has gained a competitive edge over its peers.
About GFS Stock
GlobalFoundries (GFS) is a global semiconductor company that specializes in a variety of chip technologies and services. In particular, it provides feature-rich solutions that empower its customers to create innovative products with widespread chip applications.
The company has been investing heavily in AI by developing advanced semiconductor solutions that support data-centric, connected, and intelligent technologies. This includes a range of digital, analog, mixed-signal, and radio frequency products designed for power efficiency and performance
GFS has also been expanding its manufacturing capabilities as part of strategic initiatives under the CHIPS Act. This includes a significant $1.5 billion investment to enhance its production facilities and capabilities, aiming to boost the output of critical semiconductors used in automotive, IoT, aerospace, and defense sectors.
Valued at $24.45 billion, shares of GFS have significantly underperformed, down by more than 26% year to date - starkly contrasting with the S&P 500 Index's ($SPX) gain of 11.6%. This plunge in the stock price is mainly attributed to market uncertainty and economic pressures. GFS stock is now trading at a forward P/E ratio of 31.56 and a P/S ratio of 3.63, suggesting the stock is priced at a slight premium to the sector median and its own five-year historical averages.
GFS Beats Earnings in Q2
On Tuesday, the firm released its Q2 earnings report, surpassing top and bottom line estimates easily. Sales came in at $1.6 billion, marking a modest increase of 6.6% from the previous quarter. Net income reached $155 million, slightly up from the previous quarter, but down year over year. The company reported a gross margin of 26%, which is lower than the sector median; however, its EBITDA margin of 35% gives it an edge over its peers.
In terms of liquidity, the company demonstrated a massive improvement in free cash flow, turning it from $98 million to $294 million, an impressive 200% jump from the prior quarter. The company ended the quarter with cash equivalents of $2.184 billion on hand. GlobalFoundries reduced its total debt during Q2. The non-current portion of long-term debt was reported at $1.6 billion, which represents a reduction of $114 million from the previous year. CEO Thomas Caulfield further emphasized, "We remain focused on a disciplined capex strategy and strong cash flow."
Most importantly, the EPS came in at 38 cents, smashing analysts' estimate by 7 cents, even as the figure declined by 28% from last year. Although analysts predict the company's EPS will fall by 37% this fiscal year, the outlook for fiscal year 2025 appears more optimistic. The EPS estimate significantly increases to $2.00, reflecting optimistic longer-term prospects for GFS.
The Strategic Partnership Wave
GlobalFoundries is highly regarded in the semiconductor industry, primarily due to its strategic partnerships and esteemed clientele, including Advanced Micro Devices (AMD), Qualcomm (QCOM), and NXP Semiconductors (NXPI). Particularly for AMD, GFS primarily produces silicon wafers using its advanced manufacturing technologies, which are crucial for AMD's CPUs and GPUs. These services are tailored to high-performance computing and graphics products, where efficiency and reliability are critical.
Additionally, for other clients like Qualcomm and NXP Semiconductors, GFS provides a range of technologies, including RF (radio frequency) solutions, ASICs (application-specific integrated circuits), and specialty technologies that cater to automotive, mobile, and IoT applications.
On June 20, the company announced its new collaboration with BAE Systems (BAESY). Through this partnership, these companies will strengthen the supply of critical semiconductors for national security programs. Together, the companies will work on R&D in a range of areas, including advanced packaging, GaN, silicon photonics, and process development. Under the terms of the deal, the companies have agreed to align their technology roadmaps and provide long-term support for the US to be able to make and package secure chips for use in aerospace and defense systems.
Additionally, GlobalFoundries has acquired Tagore Technology's power gallium nitride (GaN) IP, enhancing its manufacturing capabilities in high-efficiency applications for automotive, IoT, and AI data centers. This acquisition includes a team of engineers from Tagore, broadening GF's GaN technology offerings and market reach.
What Do Analysts Think About GFS Stock?
When it comes to GFS stock, most analysts have maintained their "buy" ratings, but lowered their price targets due to market sluggishness.
Jefferies analyst Blayne Curtis has reduced his price target from $62 to $55, but maintains a "buy" rating due to strong Q2 performance, particularly in the Smart Mobile Devices segment, and significant growth potential in Automotive. Despite a dip in gross margins, the company's strategic positioning and ability to secure high-margin business support a positive outlook.
On the other hand, Morgan Stanley analysts have increased their price target from $62.00 to $63.00, assigning an "overweight" rating, while TD Cowen adjusted its price target from $65 to $55 but continues to recommend a "strong buy."
Overall, Wall Street analysts are quite optimistic about GFS stock, with a consensus rating of "moderate buy." Out of 15 analysts covering the stock, 8 recommend a "strong buy," 1 suggests a "moderate buy," and 6 have given a "hold" rating. The average 12-month price target for GFS is $58.53, suggesting a 33.2% upside potential.
