2023-12-28 08:00:09 ET
Summary
- We remain sell-rated on GlobalFoundries.
- While GFS has the advantage of being outside the crosshairs of geopolitics, unlike TSMC, we don’t see the company materially growing its top line in 1H24.
- We think TSMC remains the superior pick in foundry space in 2024, with more upside potential driven by post-correction demand rebound and A.I. tailwinds.
- We expect GFS to be an in-line performer to slightly outperform in 2024.
We continue to be sell-rated on GlobalFoundries (GFS). While we think the semi market correction is over for the most part, with the expectation of the AI correction expected next year, we see better-positioned foundry players to outperform in 2024, namely TSMC (TSM). We recognize GFS' position in the top foundry players in the industry, but we think the company lacks a competitive edge in leading-edge chips and don't see GFS being meaningfully exposed to AI tailwinds. We think GFS is gaining more traction as the global concern of high concentration of semi-manufacturing in Taiwan escalates as the Biden administration tightens its chokehold on China's access to advanced tech and fears of a potential Chinese invasion of Taiwan intensify. We believe GFS' advantage is its position as the only one of the world's five top fabs located in the U.S., while the others are more geopolitically exposed with Semiconductor Manufacturing International in China, Samsung in South Korea, and United Microelectronics and TSMC in Taiwan. We're more constructive on GFS now than we were in May, but we don't see a near-term catalyst differentiating GFS and driving outperformance.
The company reported 3Q23 revenue in line with estimates and flat QoQ at $1.85B and is guiding for revenue within the range of $1.825B and $1.875B. We're less optimistic about the company's near-term performance due to a lack of near-term catalysts driving an uptick in wafer spending but also due to management's cautious near-term outlook on inventory levels. On the earnings call , management noted, "We are taking just in general a cautious approach given the fact that we still have persistently high inflation. We've got some inventory in the channel and a couple of wars going on." We think investors will be better positioned elsewhere in 1H24 as we see limited top-line growth for GFS in early 2024.
Our negative thesis of GFS seeing softer demand in data center markets in the back end of this year played out; the stock underperforms the S&P 500 by roughly 5% since our last note in May. Now, we believe the semi correction is done in the smartphone and PC market and see no more downward revisions in the data center TAM, but our less-than-optimistic outlook on GFS is based on two factors heading into 2024. The first is our belief that the smartphone TAM to which GFS is largely exposed to will not see a substantial TAM Y/Y growth next year; our current industry research shows little visibility in the smartphone market's growth. The second is our expectation that GFS won't be the main benefactor of the end-demand market rebound; instead, we think TSMC will make a better choice in the foundry space.
The following graph outlines our rating history on GFS.
SeekingAlpha
Valuation
The stock is relatively cheap, in our opinion, trading at 4.5x EV/C2023 Sales versus the peer group average of 6.5x. On a P/E basis, the stock is trading at 27.8x C2023 EPS $2.19 compared to the peer group average of 45.3x. We don't recommend investors buy the stock on weakness as we see limited upside potential for the stock. We think GFS will continue to be a secondary player in the foundry space and believe investor money would be better positioned in elsewhere.
The following chart outlines GFS's valuation against the peer group.
TSP
Word on Wall Street
Wall Street is bullish on the stock. Of the 14 analysts covering the stock, 11 are buy-rated, and the remaining are hold-rated. We attribute Wall Street's bullish sentiment on GFS to the company's 3Q23 results estimates and outlook guiding for the upper end of its guidance range provided in the August earnings release. reflecting a healthier end demand mix and driving the stock up nearly 9% post-earnings. We believe GFS delivers a more balanced risk-reward at current levels, but we don't see the stock materially outperforming the peer group in 1H24.
The stock is currently priced at $61. The median sell-side price target is $68 while the mean is $67 with a potential 10-11%. The following outlines Wall Street's sentiment on the stock.
TSP
What to do with the stock
We continue to be sell-rated on GFS. While we think the stock now provides a more balanced risk-reward profile into 1H24 than it did into 1H24, we don't see any near-term catalyst driving material outperformance. We think GFS' competitive advantage of being a method to diversify manufacturing away from Taiwan will be less important as TSMC and Intel ( INTC ) work to move chip making to U.S. soil. We see limited room for outperformance.
For further details see:
GlobalFoundries: Still A Sell, Not Our Pick Of The Fabs