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GlobalFoundries ((GFS - Free Report) ) is the third largest semiconductor foundry in the world behind Taiwan Semi ((TSM - Free Report) ) and Samsung. Recent company updates scaled back immediate growth prospects, and that's why the stock is a Zacks #5 Rank.
GFS offers its customers specialized foundry manufacturing processes, a library with thousands of qualified circuit-building block designs (IP blocks), and differentiated transistor and device technology.
They also are based in the US, which has become an important differentiator since the trade and technology "wars" of the past few years.
What Does Global Foundries Do?
GFS manufactures complex, feature-rich integrated circuits that are pervasive throughout a variety of end-markets, including digital, analog, mixed-signal, radio frequency (RF), ultra-low power, and embedded memory solutions that connect, secure, and process data and efficiently power the digital world.
Ironically, the creation of GFS was borne in 2008 of a spin-off where AMD decided it didn't want to do the foundry work anymore on its own chip designs.
While GPU makers like NVIDIA ((NVDA - Free Report) ) and Advanced Micro Devices ((AMD - Free Report) ) keep the reliable off-shore foundries busy, the competition for US-based GFS may be one factor in EPS estimates being taken down about 10% for this year and next.
According to a Wedbush note in early May... "GFS management attributed the softer Q2 and 2H outlook to generally more difficult than expected end markets resulting in a slower than expected workdown in excess inventories, with both of these factors now expected to weigh on the pace of expected revenue recovery through 2023."
The Foundry-WFE Landscape
One of my favorite semiconductor analysts is Mark Lipacis from Jefferies. He helped me see in 2018 the potential for NVIDIA gaming GPUs to be supplanted by the data-center demand for those same workhorses of "massively parallel architectures."
Here's what he wrote recently as he saw the new upward momentum in foundry WFE (wafer fabrication equipment) demands...
"We revise our 2023 WFE to $81bn vs. prior $75bn as we layer in spending of Analog and MCU players in our bottom-up model. We think the Street is underestimating demand for Trailing Node capacity, which we estimate will account for 46% of 2023 WFE spend. We forecast a WFE recovery in 2024 as semi company revenues snap back after shipping below consumption in 2023 to clear the channel of excess inventories. AMAT, NVMI and ONTO are our top Trailing Node plays."
What is the Trailing Node?
Nodes in semiconductor manufacturing indicate the features that a node production line can create on an integrated circuit, such as interconnect pitch, transistor density, transistor type, and other new technology.
This is especially important as the "leading edge" of chip design focuses on the sub-10 nanometer transistor architecture that also places new demands on the "trailing edge" that has to be able to "connect and keep up!"
In May of 2021, as supply chain issues were intensified by the pandemic shutdown, Tim Bajarin wrote this in Forbes...
"In the last few months, much has been said about the shortage of chips developed on leading edge manufacturing nodes of 7nm, 5nm, etc. While there are some shortages in chips using these advanced manufacturing processes, it turns out the semiconductor industry's other issue is at the trailing edge. The leading edge gets all the attention because it is the most exciting."
Bajarin had a good grasp at the time that the "leading edge" of chips powers the supercomputers in the cloud, advanced servers, desktops, and laptops, and even the computers in our pockets. But he explained that computing devices are not just made up of leading edge microprocessors...
"The vast majority of other components are made up using legacy nodes. Quite often many mainstream processors, especially those created for the autos, medical monitoring equipment, and a multitude of other products are created using much larger nodes in what is called the trailing edge."
These are the semiconductors chips and systems that still need to be able to "talk" to each other regardless of proprietary platforms, sub-10nm, or AI integrations on the "leading edge."
WFE Demand Historically Driven By Leading Edge and Memory
Lipacis goes on to describe the industry dynamics, even in the midst of AI-GPU mania that exceeded his expectations (but not mine, where we were heavy buyers of NVDA near $120 during the October bear market nadir)...
"Historically, WFE demand was primarily driven by leading-edge logic chips like CPUs in PCs, processors used in datacenters or application processors and modems used in cellphones, led by most advanced logic and increasingly smaller and cheaper memory solutions. Consequently, ~80% of WFE spend was driven by leading edge logic and memory."
But Trailing Node is a New Driver of WFE, Driven by an IoT Computing Era
"We've argued that the industry has entered the '4th Tectonic Shift to an IoT Computing Era,' where for the first time in history, the volume computing device, IoT, requires trailing node instead of the leading-edge chips required by previous computing eras, like handsets and PCs."
The Lipacis team estimates that this IoT Computing Era is rapidly growing to 10s of billions of devices annually, which is driving demand for trailing node WFE. They estimate that trailing node CapEx will increase from 22% of WFE historically to 46% of WFE spend in 2023 and believe the Street is underestimating the importance of Trailing Node CapEx.
They also believe that increased tensions between the US and China will lead US and European-based semiconductor companies and OEMs will shift sourcing to domestic players, ultimately translating to faster revenue growth. This works for GFS as they have EU fabs too.
Meanwhile, Raymond James analysts reiterated their Outperform rating on Global Foundries and adjusted their price target down to $75 following March quarter results...
"While the updated full-year outlook now assumes a slower than expected inventory correction across multiple end markets, the dynamics are consistent with broader industry trends, and improving mix is driving expected sequential growth through the year."
Bottom line for GFS: As the US shifts more Semi manufacture to the home base, GFS will benefit, especially as they dial in to serve the most picky customers from NVDA and AMD to INTC and MSFT. When these downward estimate revisions bottom out, you want to be a buyer of GFS. The Zacks Rank will let you know.
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Bear of the Day: GlobalFoundries (GFS)
GlobalFoundries ((GFS - Free Report) ) is the third largest semiconductor foundry in the world behind Taiwan Semi ((TSM - Free Report) ) and Samsung. Recent company updates scaled back immediate growth prospects, and that's why the stock is a Zacks #5 Rank.
GFS offers its customers specialized foundry manufacturing processes, a library with thousands of qualified circuit-building block designs (IP blocks), and differentiated transistor and device technology.
They also are based in the US, which has become an important differentiator since the trade and technology "wars" of the past few years.
What Does Global Foundries Do?
GFS manufactures complex, feature-rich integrated circuits that are pervasive throughout a variety of end-markets, including digital, analog, mixed-signal, radio frequency (RF), ultra-low power, and embedded memory solutions that connect, secure, and process data and efficiently power the digital world.
Ironically, the creation of GFS was borne in 2008 of a spin-off where AMD decided it didn't want to do the foundry work anymore on its own chip designs.
While GPU makers like NVIDIA ((NVDA - Free Report) ) and Advanced Micro Devices ((AMD - Free Report) ) keep the reliable off-shore foundries busy, the competition for US-based GFS may be one factor in EPS estimates being taken down about 10% for this year and next.
According to a Wedbush note in early May... "GFS management attributed the softer Q2 and 2H outlook to generally more difficult than expected end markets resulting in a slower than expected workdown in excess inventories, with both of these factors now expected to weigh on the pace of expected revenue recovery through 2023."
The Foundry-WFE Landscape
One of my favorite semiconductor analysts is Mark Lipacis from Jefferies. He helped me see in 2018 the potential for NVIDIA gaming GPUs to be supplanted by the data-center demand for those same workhorses of "massively parallel architectures."
Here's what he wrote recently as he saw the new upward momentum in foundry WFE (wafer fabrication equipment) demands...
"We revise our 2023 WFE to $81bn vs. prior $75bn as we layer in spending of Analog and MCU players in our bottom-up model. We think the Street is underestimating demand for Trailing Node capacity, which we estimate will account for 46% of 2023 WFE spend. We forecast a WFE recovery in 2024 as semi company revenues snap back after shipping below consumption in 2023 to clear the channel of excess inventories. AMAT, NVMI and ONTO are our top Trailing Node plays."
What is the Trailing Node?
Nodes in semiconductor manufacturing indicate the features that a node production line can create on an integrated circuit, such as interconnect pitch, transistor density, transistor type, and other new technology.
This is especially important as the "leading edge" of chip design focuses on the sub-10 nanometer transistor architecture that also places new demands on the "trailing edge" that has to be able to "connect and keep up!"
In May of 2021, as supply chain issues were intensified by the pandemic shutdown, Tim Bajarin wrote this in Forbes...
"In the last few months, much has been said about the shortage of chips developed on leading edge manufacturing nodes of 7nm, 5nm, etc. While there are some shortages in chips using these advanced manufacturing processes, it turns out the semiconductor industry's other issue is at the trailing edge. The leading edge gets all the attention because it is the most exciting."
Bajarin had a good grasp at the time that the "leading edge" of chips powers the supercomputers in the cloud, advanced servers, desktops, and laptops, and even the computers in our pockets. But he explained that computing devices are not just made up of leading edge microprocessors...
"The vast majority of other components are made up using legacy nodes. Quite often many mainstream processors, especially those created for the autos, medical monitoring equipment, and a multitude of other products are created using much larger nodes in what is called the trailing edge."
These are the semiconductors chips and systems that still need to be able to "talk" to each other regardless of proprietary platforms, sub-10nm, or AI integrations on the "leading edge."
WFE Demand Historically Driven By Leading Edge and Memory
Lipacis goes on to describe the industry dynamics, even in the midst of AI-GPU mania that exceeded his expectations (but not mine, where we were heavy buyers of NVDA near $120 during the October bear market nadir)...
"Historically, WFE demand was primarily driven by leading-edge logic chips like CPUs in PCs, processors used in datacenters or application processors and modems used in cellphones, led by most advanced logic and increasingly smaller and cheaper memory solutions. Consequently, ~80% of WFE spend was driven by leading edge logic and memory."
But Trailing Node is a New Driver of WFE, Driven by an IoT Computing Era
"We've argued that the industry has entered the '4th Tectonic Shift to an IoT Computing Era,' where for the first time in history, the volume computing device, IoT, requires trailing node instead of the leading-edge chips required by previous computing eras, like handsets and PCs."
The Lipacis team estimates that this IoT Computing Era is rapidly growing to 10s of billions of devices annually, which is driving demand for trailing node WFE. They estimate that trailing node CapEx will increase from 22% of WFE historically to 46% of WFE spend in 2023 and believe the Street is underestimating the importance of Trailing Node CapEx.
They also believe that increased tensions between the US and China will lead US and European-based semiconductor companies and OEMs will shift sourcing to domestic players, ultimately translating to faster revenue growth. This works for GFS as they have EU fabs too.
Meanwhile, Raymond James analysts reiterated their Outperform rating on Global Foundries and adjusted their price target down to $75 following March quarter results...
"While the updated full-year outlook now assumes a slower than expected inventory correction across multiple end markets, the dynamics are consistent with broader industry trends, and improving mix is driving expected sequential growth through the year."
Bottom line for GFS: As the US shifts more Semi manufacture to the home base, GFS will benefit, especially as they dial in to serve the most picky customers from NVDA and AMD to INTC and MSFT. When these downward estimate revisions bottom out, you want to be a buyer of GFS. The Zacks Rank will let you know.