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Earnings preview: Amid semiconductor-supply crunch, GlobalFoundries expected to benefit from making non-cutting-edge but essential chips

GlobalFoundries Inc. rolls into its first earnings report as a public company seeking to capitalize on its servicing of non-cutting edge chip designs amid a global semiconductor supply crunch.

GlobalFoundries $(GFS.UK)$ is scheduled to report quarterly earnings on Tuesday after the close of markets. The Malta, N.Y.-based silicon wafer foundry -- known as a fabrication plant, or "fab," in industry parlance -- debuted its stock on the Nasdaq in late October. Wall Street analysts just started coverage of the stock last week.

GlobalFoundries CEO on IPO: 'We have to accelerate our capacity'

Third-party fabs like GlobalFoundries make silicon wafers for the majority of chip makers that do not have their own fabs -- companies like Apple Inc. $(AAPL)$ and Nvidia Corp. $(NVDA)$, for example. GlobalFoundries bills itself as the third largest foundry in the world based on external sales.

While the world is still working its way through a global chip shortage, and fabs still have long back orders from customers, one of the standout aspects of GlobalFoundries is that it services chip makers that are not considered cutting edge but are essential all the same, as evidenced in shortages of inexpensive chips that are crucial for the production of autos.

"GlobalFoundries has carved out a niche in the fast-growing foundry market by focusing on older, trailing-edge technology that has been neglected by [Taiwan Semiconductor Manufacturing Co. (2330.TW)], the largest foundry company," Citi Research analyst Christopher Danley, who has a buy rating and a $75 price target, wrote in a note about the company.

"In addition, GlobalFoundries has proprietary wireless technology that has resulted in strong share gains with leading wireless companies such as Qualcomm $(QCOM)$, Broadcom $(AVGO)$, and Qorvo $(QRVO)$," he said.

Citi's Danley also sees GlobalFoundries as being a "major beneficiary from the industrywide shortages."

What to expect

Earnings: Of six analysts surveyed by FactSet, GlobalFoundries on average is expected to post a loss of a penny a share. A month ago, Thomas Caulfield, GlobalFoundries chief executive, forecast a profit of about $290 million to $300 million for the September-ending quarter. Of the seven analysts polled by FactSet, the Street expects a loss of $19.9 million.

Revenue: Wall Street expects revenue of $1.7 billion from GlobalFoundries, according to nine analysts polled by FactSet. Caulfield forecast revenue of about $1.7 billion.

Stock movement: Since the company's trading debut on Oct. 28, shares have surged 50% from their $47 IPO pricing. Over that same period, the Renaissance IPO ETF $(IPO.UK)$ has declined 5%, the PHLX Semiconductor Index has risen 13%, the S&P 500 index has advanced 2%, and the tech-heavy Nasdaq Composite Index has risen 2%.

What analysts are saying

Jefferies analyst Mark Lipacis, who has a buy rating and a $87 price target, also touched upon GlobalFoundries' focus on more practical chips.

He called the fab "the leading trailing-node, analog/mixed-signal foundry benefiting from IoT demand drivers that will translate to unit demand 10x the size of cellphones, and a shift of its customers to a fab-lite model."

"These dynamics have led to unprecedented levels of visibility and pricing power, and as a result, we expect GFS to maintain a premium valuation multiple," Lipacis said.

The analyst notes that the fab's capacity is "sold out for 2022, 94% sold out for 2023, and roughly 77% of their 2022 and 2023 sales (approx. $10 billion) are secured by long-term agreements."

Cowen analyst Krish Sankar, who has an outperform rating and a $80 price target, said GlobalFoundries strong backlog of single-source designs could double the company's gross margins through 2025 and drive a 40% earnings-per-share compound annual growth rate.

"As a U.S. DoD Trusted Foundry, a large presence in U.S., EU, and Singapore offers geographic diversity and makes it a unique play on global (ex-Greater China) tech investment themes," Sankar added.

Of the 16 analysts who initiated coverage just recently, 13 have buy ratings, two have hold ratings, and one has a sell rating, according to FactSet. Of those, analysts have an average target price of $77.41, according to FactSet data.