GlobalFoundries: Irrevocable orders exceed US$20 billion

Latest update time：2021-12-03 12:31

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It's a great time to be a chipmaker, any kind of chipmaker.

GlobalFoundries has been a popular stock since it went public in late October. Ahead of the company’s third-quarter report late Tuesday, the stock has risen 47% from its listing price. That makes the company one of the most highly valued companies in the semiconductor space at nearly 78 times forward earnings — a significant premium for a chipmaker that exited the race to make the most advanced processors several years ago. TSMC, which dominates contract chipmaking, trades for less than a third of that.

But it also sets up a challenging stage for the company’s first earnings report. GlobalFoundries said third-quarter revenue rose 56% year-over-year to $1.7 billion, and forecast a 71% increase in the current quarter. Both barely beat Wall Street expectations, though. The company also reminded investors that it plans to more than double capital spending next year as it races to build more production capacity. The stock fell more than 4% on Wednesday.

Still, much of Wall Street remains optimistic: 81% of analysts rate GlobalFoundries a buy, according to FactSet. GlobalFoundries’ sweet spot remains achieved during the current chip shortage that has drawn particular attention to older process nodes in smartphones, data centers and cars. The company said on an earnings call that utilization of its chipmaking facilities is “over 100%” despite recent capacity additions.

The shortages also allow GlobalFoundries to effectively book business years into the future. The company said it now has more than $20 billion in “long-term agreements” that it can’t cancel, nearly four times its current trailing-12-month revenue base. Dave Reeder, the company’s chief financial officer, said on a conference call that a large portion of that business is “sole-source” deals — offsetting the risk of chip buyers canceling orders because they find supplies elsewhere.

Still, GlobalFoundries must compete with deeper pockets in a market where demand for equipment and talent is tight. Indeed, the company’s $4.5 billion in capital expenditures planned for next year looks puny compared with Intel Corp.’s and TSMC’s plans of $26 billion and $35 billion, respectively. Rich multiples can increase volatility in the stock — especially if U.S. lawmakers fail to pass the CHIPS for America bill that would provide subsidies to domestic chipmakers.

But having such a strong foundation for future business should help GlobalFoundries' valuation grow. In fact, the stock trades at roughly the same multiple as TSMC relative to 2023 expected earnings. This shortage won't last forever, but it will likely last until it's time for GlobalFoundries to cash in on some chips.

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