The artificial intelligence (AI) wave is definitely here and is in its early stages, perhaps similar to the dotcom wave of the late 90s and early 2000s. The structural changes accompanying the digital world economy will disproportionately benefit some sectors. than others. One sector that could benefit disproportionately is the semiconductor sector, with different types of core chips that enable AI-level computing.
So far, Indian listed companies are not offering much of an opportunity to tap into the semiconductor sector. Therefore, investors interested in participating in this opportunity should keep an eye on opportunities in the US market. The U.S. listed semiconductor stock portfolio is a universe within a universe, containing nearly 100 publicly traded stocks including chip designers, fabless chip companies, semiconductor equipment makers, equipment and chip testing companies, packaging companies and foundries. . Thus, while Nvidia played a central role in the surge in demand for AI computing chips among semiconductor companies last month, the AI theme will permeate the entire semiconductor ecosystem. Different stocks within the ecosystem offer good entry opportunities at different times based on valuations and growth prospects.
One company we currently offer such an opportunity and which we believe will benefit from the AI theme is NASDAQ-listed GlobalFoundries (Ticker: GFS). Investors are encouraged to build up gradually. Many of the world’s largest semiconductor giants such as Nvidia, Advanced Micro Devices (AMD), Qualcomm, Broadcom, and Micron follow a so-called fabless business model, designing and selling hardware/semiconductor chips, but not manufacturing chips. is outsourced. A foundry is a factory that manufactures semiconductor chips. Manufacturing semiconductor chips is a complex, high-tech-driven process that only a handful of companies have established themselves in, including GlobalFoundries.
Aside from the AI theme, another structural theme in favor of GlobalFoundries is supply chain risk mitigation, which companies and governments are working on with the express intention of increasing chip sourcing outside of China/Taiwan. increase. This, combined with the glut of China-Taiwan ties, is a favorable factor for Globalfoundries, which has no exposure to the region. This is one of the reasons why GlobalFoundries is a better investment choice compared to the world leader in the foundry field, Taiwan Semiconductor Manufacturing Company. As of 2022, nearly 50% of foundry capacity was in Taiwan.
So GlobalFoundries presents a good opportunity for the theme, but we also see speed gains along the way. First and foremost is the fact that semiconductors are notoriously cyclical industries. Second, GlobalFoundries’ valuation of 25x 1-year forward earnings and 10.8x EV/EBITDA isn’t expensive, but it’s not cheap either. Third, a global economic slowdown could impact short-term performance. So while thematic opportunities are powerful, we recommend accumulating them rather than buying them.
business and outlook
GlobalFoundries was founded in 2009 when a subsidiary of sovereign wealth fund Mubadala acquired AMD’s manufacturing operations. Since then, its size has grown significantly with billions of dollars invested in acquisitions and expanding production capacity. The company was listed on the stock market through an IPO in October 2021. Mubadala now owns about 85% of the company.
Today, GlobalFoundries is one of the world’s leading semiconductor companies with approximately 7% (#3) share of the foundry market. The company manufactures complex, feature-rich integrated circuits (chips) that enable the functionality of billions of electronic devices around the world. We serve a wide range of customers, including world leaders in chip design, and provide optimized solutions for the functionality, performance and power requirements of critical semiconductor applications.
As mentioned earlier, chip manufacturing is a highly complex process that involves the intensive application of advanced technology. Foundries bring efficiencies to their manufacturing processes through innovations that shrink the size of transistor chips, delivering significant value to their customers’ businesses. In industry terms, one way to measure efficiency is based on nanometers (NM) or chip size. Chips with smaller nm are more efficient (lower power consumption) and faster (computing performance). The advanced technology required for such innovations and multiple other features of the chip has created a large moat for incumbent foundry companies. This factor also makes our relationships with existing customers very strong and persistent. This gives you better visibility into your long-term earnings.
Within the foundry sector, GlobalFoundries focuses on manufacturing so-called mass-market semiconductors. It represents an integrated circuit with multiple functions serving a wide range of applications that meet the requirements of a wide range of end markets compared to traditional integrated circuits focused on computing-centric vertical markets.
GlobalFoundries, TSMC, Samsung Semiconductor, Semiconductor Manufacturing International Corporation and United Microelectronics Corporation are currently the only five large foundries in the world. Of these, GlobalFoundries is the only global company not based in China or Taiwan, enabling customers to mitigate geopolitical risks in their supply chains. Last year, the US government passed the ChipPlus Act, which provides large sums of money to US semiconductor manufacturing. Globafoundries is well positioned to take advantage of it.
Finance
GlobalFoundries reported solid growth of $8.1 billion, up 23% in 2022, but is expected to report a revenue decline of 7.5% in 2023. This decline followed two strong years in CY21 and CY22. Revenue increased nearly 70% over two years, reflecting strong demand for chips. The decline in CY23 reflects destocking efforts by customers and industry cyclicality. Despite the trend in sales, profit margins are on an upward trend. A recovery in earnings trends is also expected for him in CY24. However, while the exact trajectory of business trends may vary depending on multiple drivers of the global economy, long-term structural trends bode very well for GlobalFoundries. This should be reflected in the financials over the next 3-5 years. The company also has a modest net cash position and a strong balance sheet.
large pure foundry
Ready to benefit from the AI wave
The only player who does not leave footprints in China/Taiwan
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