GlobalFoundries Stock: Same Headwind, Different Quarter – Hold-Rating (NASDAQ:GFS)

quantic69/iStock via Getty Images Investment Thesis I last wrote on GlobalFoundries Inc. (NASDAQ:GFS) with a neutral rating ahead of their first quarter of FY2024 earning results and outlook for the full fiscal year; I’m writing to reaffirm my less optimistic outlook on the stock after 1Q24 earning results confirmed my concern about lumpy smart mobile device-related sales weighing on the company’s financial performance. The company reported its smart mobile device revenue down 11% sequentially and 2% from a year ago quarter to $680 million, compared to $765 million last quarter. On the earnings call, management mentioned seeing “positive indicators across the smart mobile device ecosystem as excess inventories are drawing down…” I’m not too convinced that GlobalFoundries’ positive indicators will turn into profit in the near-term for two reasons. The first is that management’s commentary regarding customer reduction of inventory levels is still not showing up in its financial statements; the company’s inventory level is higher as of March 31st, 2024, than it was at the end of December 31st, 2023. What this tells us is that inventory digestion is still happening and so the restocking hasn’t kicked in yet if the company’s inventory is higher. The image below shows GlobalFoundries’ financial statement from the company’s earnings presentation. Global Foundries Earnings Presentation The second is that I still think GlobalFoundries is too exposed to what continues to be a weak end-demand environment for smartphones; the company’s exposure stands at roughly 44% of its total revenue. The rest of GlobalFoundries’ revenue comes from communications infrastructure and data centers at 8%, home and industrial IoT at 20%, and automotive at 17%, as shown in the image from the company’s earnings presentation for 1Q24. Global Foundries Earnings Presentation The earnings call and the Street comments on GlobalFoundries were more positive after this quarter; the reason is because of GlobalFoundries’ better-than-expected net income of $134 million ($0.24 per share). The company actually doubled net income in comparison to analyst expectations this quarter, which were for $73.96 million (($0.13 per share). I get investor excitement about the better net income, which causes the stock to rally after the results, as shown below on the stock’s three-month chart against the S&P 500. But, the company still reported revenue that declined year-over-year to $1.55 billion compared to $1.84 billion. The company’s outlook for next quarter is also not inspiring, with revenue estimated to be $1.59 billion to $1.64 billion, with a midpoint more or less in line with Wall Street expectations at $1.61 billion. YCharts Regenerating the six-month chart of GlobalFoundries against Super Micro Computer, United Microelectronics, and the S&P 500, the same trend that appeared in March still stands today: GlobalFoundries continues to underperform the peer group and proves less resilient to the semi industry downturn, because of its heavy smartphone exposure, in my opinion. Apple (AAPL) did surge this quarter after its earnings call, but that was not due to better iPhone end demand. Even Qualcomm and Skyworks results this quarter confirm that the end demand for smartphones is still not upon us. YCharts What about Valuation? GlobalFoundries is not expensive, based on a relative valuation methodology. GlobalFoundries trades at a Price/Earnings ratio of 38.0 for CY2024 while the peer group ratio is 35.8, as shown in the data below generated from Refinitiv. The stock trades at a ratio of 4.1 on an EV/Sales metric, while the peer group average ratio stands at 6.8. The stock’s valuation is attractive for the prospect of smart mobile device sales recovering in 2025 but I think it’s too early to jump in. I don’t think the stock is a value bargain in the current environment. I think it’ll be difficult for the company to outperform its peer group in the second half of the year. Image created by The Techie with data from Refinitiv What’s Next? GlobalFoundries is a foundry player competing mainly with TSMC (TSM), although retaining a much smaller share of the market, estimated by counterpoint to have captured 6% of the market, as shown below. The core of my pessimism on the stock is the fact that GlobalFoundries gets almost half of its revenue from smartphone demand. To add, GlobalFoundries doesn’t have the AI exposure that would offset something like this, while TSMC does, for example. Counterpoint I don’t see more downside going forward, but I think there is little upside to the S&P 500 in the near-term. I will continue to watch for signs of smartphone recovery from the semi peer group with exposure to Apple Skyworks, Qualcomm, and Qorvo; that’s the golden ticket to pinpoint demand recovery ahead of the fact. I think we’ll see better end-demand dynamics in 2025 but I wouldn’t hold my breath for 2024. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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