GlobalFoundries (Nasdaq: GFS) is trending on Wall Street after impressive earnings growth amid the chip shortage. In fact, GFS stock is outperforming its peers as it continues ramping production.
The chip shortage is lasting longer than most experts predicted. The scarcity is causing drastic effects across the economy, with used car prices soaring 40.5%, leading to the highest inflation to 40-year highs. Yet other semiconductor stocks like AMD (Nasdaq: AMD) and Nvidia (Nasdaq: NVDA) are lagging as valuations come back into focus.
With the Fed changing its policy stance from pro-growth to slowing inflation, investors are reducing portfolio risk. As a result, highly valued growth stocks are losing in favor of value.
Although GlobalFoundries is far from a value stock, the company is becoming a Wall Street favorite as it looks to solve the chip shortage. Can the underdog company solve one of the biggest crises pressuring the global economy?
Let’s see how the company plans to do so and how GFS stock can benefit from this environment.
GlobalFoundries: The Next Chipmaking Powerhouse?
Computer chips are playing an ever-increasing role in our lives. They are now powering everything from smartphones to your vehicles. But making these devices is not easy. In fact, it involves hundreds of steps that can take months to produce.
Not only that, but the equipment costs millions of dollars and cannot be “infected” with outside air or dust. The chips are becoming increasingly more complex as technology continues progressing.
With this in mind, GlobalFoundries is stepping up to address the growing need. The company started as a manufacturing arm for AMD and is growing into a chipmaking powerhouse. That said, some of its biggest clients now include:
On top of this, the company is addressing growing markets like smartphones (5G), automotive and the internet of things (IoT). However, what makes GFS stock unique is that it is a semiconductor foundry.
A foundry makes computer chips for other businesses who need them to power their technology like Apple (Nasdaq: AAPL). That said, foundries play a vital role in the supply chain.
So, when new tech hits the market like 5G or self-driving cars, a foundry often supplies the chips. The largest and most well-known semi foundry is Taiwan Semiconductor Manufacturing Co. (NYSE: TSM), with over $15.7B in revenue last quarter.
GlobalFoundries is the 3rd largest foundry, behind TSM and Samsung. The chipmaker has 14 locations in the U.S., Germany and Singapore, with over 200 customers.
Impressive Earnings Growth
After another big earnings beat, this marks the second quarter in a row of GlobalFoundries profitability. The chipmaker saw record growth across the board, with demand for semis not slowing.
- Revenue up 74% to $1.85B.
- Net Income up 108% to $43M.
- Gross Profit up 276% to $384M.
- Operating Profit up 118% to $87M.
- Cash from operations up 571% to $947M.
As can be seen, the semi business is booming. That said, the company is ramping production to meet the ongoing demand. Most importantly, GFS stock is turning profitable with net income accelerating 760% from $5M in Q3 to $43M in Q4.
With this in mind, CEO Tom Caulfield believes the momentum will continue this year, saying:
“We are executing well, and believe we are on track to deliver another year of strong growth in revenue and profitability in 2022.”
Caulfield also attributed the company’s growth to signing long-term partnerships with key businesses. First, GF is extending its wafer supply agreement with AMD while extending supply through 2025. Secondly, GFS is partnering with BMW to secure long-term semi supplies. And lastly, GFS and Ford are collaborating to boost chip sales for the auto industry.
On top of this, the company is aggressively expanding its manufacturing ability. With 30 long-term partnership agreements committing over $3.2B, GFS is well-positioned to sustain the growth.
So far, GFS is already working on a new plant in Singapore and planning to build its most advanced facility in upstate New York. On top of this, the chipmaker is expanding capacity by 25% in Dresden.
GFS Stock Analysis
After its debut last October, GFS stock gained over 55% in a month as Wall Street bought into the business model. However, GFS shares are getting dragged down with overall market weakness since then.
Good setups in the market are hard to come by right now. In fact, semiconductors are one of the weakest performing groups. The VanEck Semi ETF (Nasdaq: SMH) lost 8% in the past month.
At the same time, computer chips are more essential than ever. Global semi sales are soaring, with total sales breaking an industry record last year with over 1 trillion. With this in mind, the tech selloff is rippling across the market, with software and semi’s leading the way down.
Although the company is experiencing solid growth, GFS stock is still subject to the overall market trends. Especially as a newly profitable company, GFS can be viewed as a riskier investment.
That being said, GFS stock has high institutional ownership at over 95% as Wall Street continues betting on the foundry.
Forecasting GFS Stock: Where Do We Go From Here
With GFS stock down over 25% from its highs, you would think it’s losing business. But GlobalFoundries is just getting started on its mission.
After an explosive year in 2021, GFS looks to continue building momentum this year. The foundry is partnering with some of the top brands globally to help ease the chip shortage while extending its reach.
It’s important to keep in mind semiconductors tend to be cyclical, with newer, more advanced chips constantly being developed.
However, GFS is making the most of the chip shortage by accelerating its business plan and capitalizing on the higher demand. With several long-term partnerships now under its belt, the company is on track to see continued growth.
And with several new facilities coming soon, they should have the ability to continue building these long-term partnerships to drive revenue. In the long run, GFS is positioning itself to become a chipmaking powerhouse with the ability to power advanced technologies.
Pete Johnson is an experienced financial writer and content creator who specializes in equity research and derivatives. He has over ten years of personal investing experience. Digging through 10-K forms and finding hidden gems is his favorite pastime. When Pete isn’t researching stocks or writing, you can find him enjoying the outdoors or working up a sweat exercising.
