New York-based Globalfoundries (NASDAQ:) is one of the well-known semiconductor manufacturing companies in the United States and globally.
The company went public through an initial public offering of 55 million shares in October 2021 and yielded a return of 40% through December 2021.
Post this, the stock lost momentum due to headwinds related to raw materials shortages, labor issues, and cost inflation prevalent in the industry. GlobalFoundries’ stock price has declined 21.4% since the beginning of 2022.
Buying the stock at the current low prices could be advantageous for long-term investors as the company seems to have all the ingredients to bounce back once its expansionary initiatives start yielding benefits.
Also, the company will get a push as and when the operating conditions in the industry improve and the Governmental aid, under the purview of the U.S. CHIPS Act of 2022, to boost semiconductor manufacturing in the country starts pouring in.
Unpinning GlobalFoundries’ Growth Story
Since the IPO, GlobalFoundries’ top-line trajectory has been very impressive. Solid demand for semiconductor products from smart mobile devices, communications infrastructure & datacenter, home and industrial IoT, and automotive end markets has fueled the top-line growth of this company.
Notably, the company generated 49% of its second-quarter revenues from the smart mobile devices market and 17% each from communications infrastructure & datacenter and home & industrial IoT markets.
End-Market Revenue Breakdown.
In the quarters ahead, solid demand for wafers in various end markets will benefit GlobalFoundries. The company anticipates remaining oversubscribed for 2022 and 2023. At the end of the second quarter of 2022, demand for products outpaced the company’s ability to supply by 10%.
In addition to solid demand, long-term agreements with customers are a boon for GlobalFoundries. Revenues of $27 billion are forecast from long-term agreements with 36 customers in the years ahead. This is way higher than the $20 billion in revenues expected from long-term agreements after the IPO.
At this juncture, GlobalFoundries’ revised agreement with Qualcomm Technologies, a subsidiary of Qualcomm Incorporated (NASDAQ:), is worth mentioning. Under this multi-year deal, GlobalFoundries will supply wafers worth >$4 billion to Qualcomm through 2028. For this, GlobalFoundries will have to expand the capabilities of its manufacturing plant located in New York. The company anticipates generating >$7 billion in revenues from Qualcomm through 2028.
In addition to Qualcomm’s agreement, GlobalFoundries’ other initiatives to boost its manufacturing capabilities will help it leverage high demand in the industry. Notably, the company is working with STMicroelectronics (NYSE:) to create and operate a 300mm semiconductor manufacturing facility in France.
Moreover, it is expanding its manufacturing capabilities in Singapore. Once development at this site gets completed, the company will be able to supply chips for use in smartphones, IoT devices, automobiles, wireless connectivity, and other products.
Looking Ahead
In the near term, solid demand will help negate the adverse impacts of industry headwinds on its financials. For the third quarter of 2022, the company anticipates revenues to be within the $2,035-$2,065 million range, with the mid-point being $2,050 million.
Notably, the mid-point represents a growth of 20.6% from the year-ago quarter and a 2.9% increase from the first quarter of 2022. The consensus estimate for GlobalFoundries’ third-quarter revenues is $2.05 billion.
On the costs and expenses front, all things seem to be in control of GlobalFoundries. After a slight quarterly increase in the first quarter of 2022, the company’s cost of revenue declined 1.1% sequentially in the second quarter of 2022. The adjusted gross margin was 28% in the second quarter of 2022, up from 25.3% in the first quarter of 2022.
On the other hand, operating expenses have shown a declining trend since the IPO quarter of 2021. The adjusted operating margin in the second quarter was 17.6% versus 14.4% in the first quarter.
Adjusted earnings grew from $0.42 per share in the first quarter to $0.58 per share in the second quarter of 2022. Reported earnings were $0.48 per share in the second quarter and $0.33 per share in the first quarter.
Financial Statement.
For the third quarter of 2022, GlobalFoundries forecasts a gross margin of 29% and expects adjusted earnings per share to be within the $0.59-$0.65 per share range, with the mid-point being $0.62 per share. The consensus estimate for the company’s third-quarter earnings is pegged at $0.62 per share.
Also, the company’s cash position is solid, which enables it to invest money in its expansionary projects. Exiting the second quarter of 2022, the company had cash and cash equivalents of $2,474 million, and its cash flow from operations was $609 million.
Conclusion
For a recently-listed company like GlobalFoundries, solid top-line, margin, and bottom-line prospects are appealing. Its market capitalization increased 9.4% from the IPO level of $25.9 billion to $28.8 billion within a few months, strengthening our take on the company.
Furthermore, the company’s cumulative returns in the past year have been impressive compared with the and top peers, including Micron Technology (NASDAQ:), Intel Corporation (NASDAQ:), and NVIDIA Corporation (NASDAQ:).
Past Year Cumulative Performance.
I find the stock a worthy investment option at current levels, despite being overvalued compared with the industry (the stock’s forward P/E is 20.47 versus 17.13 for the peer group).
I believe that investments made today in the stock will yield benefits in the long run, keeping in mind the company’s expansionary efforts and the U.S. CHIPS Act of 2022.
