GlobalFoundries

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

GlobalFoundries is a global semiconductor manufacturing company that provides its services to other companies that do the design of chips and are mainly a foundry, and as such, they don’t manufacture any chips of their own design.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

GlobalFoundries (GFS) operates as a pure-play foundry, meaning it manufactures semiconductors for other companies (fabless), and does not produce or sell its own branded chips. This distinguishes GFS from integrated device manufacturers (IDMs) like Intel or Samsung, which both design and manufacture their own chips. As a foundry, GFS’s revenue is primarily driven by wafer fabrication service sales (100% of revenues in 2022 and 2021), where it uses its manufacturing facilities to produce complex semiconductor chips based on customer designs.

  • Revenue Distribution 90% of GFS’s revenue is from manufacturing semiconductors and 10% comes from the assembly and testing of these chips. The company’s revenues are primarily from long-term supply agreements, with some fixed pricing, but other revenues are determined by prices at the time of shipment.

    • By Geography: The company’s largest markets are the United States, Singapore, Europe, and other areas in Asia Pacific. GFS is expanding its manufacturing capacity in the United States, Germany, and Singapore. For the year ended December 31, 2022, the company generated $4.77 billion in revenue from the United States, $2.02 Billion from Germany, $1.71 Billion from Singapore, and $1.11 Billion from Other countries.
  • Trends in the Semiconductor Industry: The semiconductor industry is highly cyclical, with strong demand followed by periods of oversupply. Furthermore, the demand for leading-edge technology is very different from demand for mature technologies.
  • Competitive Landscape: The foundry landscape is dominated by TSMC and Samsung, each enjoying a significant share of the market. However, GFS has certain competitive advantages in its niche, such as its specialty and focus on mature technology, differentiated process technologies, and a geographically diverse customer base.
    • Large Scale: Being a large-scale company is important in this industry, because the fixed costs for plants, facilities and machinery is enormous. As stated on the index, scale advantages can create durable economic moats.
    • Focus: The company focuses on differentiated manufacturing solutions and offers a wide variety of manufacturing capacities, that include feature-rich CMOS solutions, and high-performance RF, power, and embedded technologies.
  • What Makes GFS Different: GFS sets itself apart from competitors by focusing on non-bleeding edge and more mature technology that is proven to be reliable and cost-effective. This allows it to cater to industries that don’t need the most cutting-edge technology, like the automotive, industrial, and communications industries, and thus provide long-term stability to customers looking for an established supply chain.
  • Margins:
    • Gross Margin: GFS has shown significant improvement in its profitability, with a gross margin that increased to 28% in 2022 from 2.6% in 2020. This is due to a variety of factors, including increases in ASPs, cost reductions, and higher capacity utilization. For example, management has mentioned on conference calls that for FY22 the company raised its prices and has been able to pass the increased costs to its customers.
    • Operating Margin: The company’s operating margins, however, are still low because of high operational expenses, at 8% in 2022. However, they have greatly improved as compared to the negative 47% margin in 2020, and 2021’s negative 4%.
  • Debt: The company has a high debt of about 8 Billion dollars at the end of 2022 and $6.1 billion by the end of 2021, but is not a concern due to its high cash generation and low credit risk. Additionally, it is paying off long term debt, and reducing it as time goes on. The company also has a $1 Billion dollar revolver in place.

Financials In Depth

GFS has shown a strong growth in revenues. GFS’s business has been doing very well, and the company is generating large increases in revenue. The company is focused on its operations and building out existing facilities.

  • Revenues: Increased year-over-year to about $7 billion in 2022, and $6.3 Billion in 2021, up from $4.8 billion in 2020. This is due to higher demand for the company’s manufacturing services, as well as higher average selling prices (ASPs). The company expects this trend to continue in the coming years.
  • Gross Profit: Has grown significantly. For the year ended December 31st, 2022, the gross profit was $1,994 Million, a very large increase compared to the loss from 2020 of about $122 Million. The gross profit in 2021 was about $697 Million, more than $800 million less than 2022. This is due to a variety of factors including higher sales, and improvements in the company’s production.
  • Net Income: Has improved, from a loss of over $1.3 Billion in 2021 to a net profit of around $1.77 billion by the end of 2022.
  • Free Cash Flows: Have been consistently improving and the company now generates substantial positive free cash flow for the past few years.
  • Debt: GFS has a high debt of around $8 billion, but the company’s interest expense was $370 Million, and there are no short term solvency issues.
  • Capital Expenditures: In 2022, the company spent $2.6 Billion on capital expenditures, and about 3 billion in 2021. This indicates a heavy investment in the company and a great long-term commitment to business.
  • Cash: As of the end of 2022, the company had over $2.3 billion dollars in cash, which would lead to a fairly healthy current ratio (ratio of current assets to current liabilities).
  • Revenue Guidance: The company is expecting revenue to be approximately $7.2-7.4 billion in 2023. GFS noted that it expects to be less exposed to cyclicality as it has focused on supply chain and long term partnerships with its customers. The company does see a continued growth in the long term, and is increasing its wafer production capabilities.

Moat Rating: 3/5 GFS does have some unique characteristics that contribute to a competitive advantage over competitors. * Switching Costs: One of GFS’s strengths is that it can benefit from switching costs. Because GFS makes specialized products for other companies, these companies have a high risk of losing product quality if they switch to another manufacturer. It will take time to re-train its engineers with another supplier and re-establish a relationship with them. Thus, customers can be “locked-in” to GFS for a long period of time. A good portion of the business (as claimed by the company) comes from long-term contracts.

  • Economies of Scale: By nature of their business, GFS has had to have a high production capacity in order to generate revenue and they do sell to many large customers. This is a strong sign that they have benefited from large scale operations. They can also continue to increase efficiencies.

However, there are also some challenges that diminish the width of GFS’s moat.

  • Rivalry from Competitors: The chip foundry sector is very competitive, with major players like TSMC and Samsung dominating the leading-edge space. While GFS has strengths in more mature nodes and customized solutions, they will face competition from many other companies.
  • Replicable Processes: While the company has proprietary technology, most of the processes are somewhat replicable, meaning that it may be easy for other players to adopt them.

Despite these challenges, the company is fairly successful at generating long term profits as long as its operations do well and demand for chips stays consistent.

Understandability Rating: 4 / 5

The business model is relatively straightforward—GFS manufactures semiconductors based on customer designs. The revenue streams, operating model, and key players are easily understood for anyone with basic knowledge of the semiconductor market.

The technology used by GFS may seem quite complex to a casual observer, but at its core, it’s a foundry that provides customized production, rather than just a semiconductor company focusing on design. There are numerous complex parts of business for the company, like what specific manufacturing techniques are being utilized and their R&D processes. Although the business is reasonably easy to understand, these nuanced and complicated technical aspects and financials give a 4/5 for understanding.

Balance Sheet Health: 4 / 5

GFS has made major improvements in its balance sheet. While the company has a high amount of debt, it also has a lot of cash on hand and generates strong positive free cash flow. This provides adequate coverage and room to pay down debt. The company also has substantial capital investment requirements to keep itself up to date and to grow its future business and earnings. GFS does not hold a lot of financial derivatives that require complex valuation.

All of that leads to a reasonably high balance sheet health rating of 4/5.

Risks to the Moat and Business Resilience:

Several legitimate risks could affect GFS and its moat:

  • Technological Disruption: The semiconductor industry is rapidly evolving. If GFS fails to keep up with the newest technologies or is unable to implement newer processes, its competitive position can be damaged. However, the company is focusing on mature technologies and has a well defined roadmap for what they are expecting to do.
  • Demand Cyclicality: The cyclical nature of the semiconductor industry could lead to volatile demand and a subsequent decrease in profitablity. Management has stated that the nature of their contracts have helped them smooth out some of the demand fluctuations, and their focus on mature technologies has helped with long term predictability of customers.
  • Customer Concentration: Because the client pool of GFS includes some large companies, they are susceptible to losses in revenues when demand for those specific customers decline.
  • Geopolitical Risks: With multiple locations around the world, and in particular in Singapore, the company is susceptible to various geo-political uncertainties, and events such as war or terrorism in those countries. However, as the company’s base of operations is so widely diversified, its risk could be offset across a variety of locations.
  • Capital Investments: GFS has ongoing capital expenditure requirements to stay up to date and expand, and if these plans or financing falls through, it could harm the company’s ability to meet future demand.
  • Talent Acquisition: Skilled personnel is a limited resource, and GFS needs to keep attracting and retaining engineers that can help them operate at the highest levels. Loss of this talent may affect its operations. However, the company has a lot of focus on employee well-being, which should give them an advantage in this area.

Despite these risks, GFS’s resilience in its business can be seen in its geographically distributed customer base, its focus on mature processes, and its high level of capital investments. This means the company is better positioned than other companies to handle disruptions to revenue and income, giving it an overall high level of survivability.