28 October Dubai-based semiconductor manufacturer GlobalFoundries (NASDAQ: GFS) arranges an IPO. We decided to study the company and its prospects, to solve, is it worth investing in this business.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
What do they earn
Often, when reporting companies, the numbers are rounded up, therefore, the totals in graphs and tables may not converge.
The main source of information about the company for us will be its registration prospectus. GFS manufactures integrated circuits for other companies, producing semiconductor components.
By segment, GFS revenue is divided as follows::
- Manufacture of plates according to the order of our customers - 91,54%.
- Other services - 8,46%. Projection, testing, packaging and other non-core services.
Revenue by country and region:
- USA - 69,44%.
- Europe, Middle East and Africa - 9,3%.
- Taiwan - 9,41%.
- China - 7,86%.
- Other, unnamed countries and regions - 3,99%.
The company is unprofitable: total margin in 2020 was −27.85% of revenue, in the first half of 2021, the final margin was -9.9%.
Arguments in favor of the company
"Here is enchantment and revenge, courage and honor". When there is a shortage of semiconductors in the world, everyone starts to respect very much these semiconductors. Because the market now began to grow after that, how it stalled for several years. Since chips are now needed in any more or less serious electronics, then GFS can hope for an increase in orders. AND, what is even more important, the company's stock may attract interest in GFS precisely because of its relationship to the hot topic of semiconductors.
But the company's business itself has good prospects.: GFS signed $ 10 billion tentative wafer supply agreements with customers for the period 2022-2023 - almost two full years of operation. I think, that the volume of orders from GFS will grow, because in the future the company, taught by bitter experience 2021, will order this kind of materials for future use, so that the factories do not have to be stopped, because the chips didn't arrive on time.
“Let the flying carpet take you away from worries to the east, where the tale calls!» Target market of the company, according to her calculations, is $ 54 billion. It is broken down into the following segments:
- Smartphones and tablets - 22 billion. The average annual growth rate in this market until 2025 is expected to be at the level of 6,3%.
- Home appliances and industry - 18 billion. The average annual growth rate in this market until 2025 is expected to be at the level of 7,6%.
- Communication infrastructure and data centers - 9 billion. The average annual growth rate in this market until 2025 is expected to be at the level of 5,4%.
- Automotive industry - 4 billion. The average annual growth rate until 2025 in this market is expected in the region 20%.
- Personal computers - billion. The average annual growth rate in this market until 2025 is expected to be around 2,5%.
At a price 47 $ per share and expected capitalization in the region of $ 25.1 billion GFS will cost approximately four annual revenue, if we extrapolate the results of the first half of 2021 to the second half of the year. This is quite comparable with its competitors from United Microelectronics and is much cheaper than Microchip, which is worth more than seven of its annual proceeds. GFS may cost a little less at the start of placement: IPO share price range - 42-47 $. But from the experience of many recent IPOs, I can assume, that shares will not sell at the lowest price.
"Here poison and damask promise death, look don't yawn!» GFS has manufacturing facilities in the USA, Germany and Singapore. GFS itself is not an American company: it belongs to a fund from the UAE. After IPO, Dubai-based company Mubadala will remain the controlling shareholder of GFS - 89,4% Shares. Mubadala is owned by the government of Abu Dhabi - in fact, Emir Abu Dhabi, to the ruler of the UAE. UAE is considered an ally of the United States, and the company's factories are located far from China and mainly in the West. That's why I think, that in ideological terms, investors will consider GFS "good".
It happened, that the lion's share of the direct production of raw materials - silicon wafers - is located in Asian countries. Moreover, the absolute leader is Taiwan represented by TSMC, perilously close to a growing and increasingly aggressive PRC, Where is, by the way, Taiwan is considered a province. In case the Chinese attack Taiwan - and they tend to do so, - the world will find itself without the necessary raw materials and paralysis awaits the high-tech industry of Western countries.
So it's like in "Dune", where control of the planet Arrakis allowed him to influence the entire universe known to mankind, since only on this planet was mined a resource of critical importance for intergalactic transportation melange. Lucky for the West, semiconductor wafers can be produced in other countries, except Taiwan.
Therefore, the West will strongly support the production of such high-tech raw materials, no matter how unprofitable this production may be, - just so that it is at hand and does not depend directly on the situation with China.
The second important point: China develops its own high-tech production and invests a lot of money in it. The Western establishment is interested in, so that China will always remain the country of making sneakers, and therefore the West will try to block the development of this country.
One of the fronts of such a blockade will be to increase the investment attractiveness of the semiconductor industry in the West - so that the influx of personnel and money goes into the development of the Western semiconductor industry, not China.
Even if the GFS IPO is not without problems, then in the long run, these stocks look very promising - largely because, that there is a high probability of their pumping for political purposes.
Something similar we could already see in due time with Tesla, to the numerous flaws of which and investors, and regulators looked through their fingers for many years, - and as a result, the company has become the beauty and pride of the electric car industry, turning a profit and inspiring many other companies to develop the production of electric cars. Think, GFS will follow the same path: she will be pumped quotes, to attract private capital into this area and stimulate the development of semiconductor production in developed countries.
"Oh wondrous east! Oh fabulous land!» In the long run, the company may well be bought: its closest competitors are the much larger Samsung and TSMC. With their bottomless pockets - so they might as well buy a GFS, whose market share is 7%. У TSMC — 54%, а у Samsung — 17%. This stimulates the latter to expand., in order to strengthen its position and further increase prices.
However, this may be prevented by certain circumstances, caused by the structure of company ownership.
What can get in the way
Not so cool. GFS makes older chips, than its competitors from Taiwanese TSMC, — so it initially has a lower margin. It is also worth considering the inevitably high costs.. All in all, GFS may remain unprofitable for a very, very long time. Actually, that fact, that it remains unprofitable even in the midst of a shortage of semiconductors and rising prices for its products, - it's not good.
Unprofitable companies can be very volatile. With losses, the company's estimated capitalization of $25.1 billion looks excessive.
"Though sly and cruel, but beautiful east. Sharpen your blade and go!» The company is registered in the Caymans, which allows it to circumvent some of the NASDAQ requirements. In particular, GFS is not required to include mostly independent directors on the company's board of directors, also, it should not arrange a vote of shareholders on certain issues, associated with the payment of remuneration to employees by shares. But it's the little things., the main problem lies elsewhere. That fact, that GFS will be owned by the UAE government, - that's good, and bad at the same time.
Good because, that the UAE is considered a "good" country in the US and the West, - means, no reason to count, that GFS quotes will ignore or discriminate on purpose. It is also good because, that the ruling families of the UAE, through such investments, are trying to integrate into technological chains important for the West and thus secure their political future. Dynastic marriages are gone, but there is investment. In other words, Mubadala, probably, will not list the company on the stock exchange, then to plunder it and bankrupt it: for Mubadala it will be the same as, to steal from yourself.
It's bad in that case., if GFS is needed by the ruling circles of the UAE for political projects. Then it turns out, that GFS is less of a commercial — and more of a political project for the main shareholder — Mubadala. This means, that the sale of GFS in the foreseeable future is unlikely, although that would be a big plus for the rest of GFS shareholders. This is indirectly indicated by, that the owners of GFS earlier this year refused to sell Intel for $30 billion. Mubadala's "don't sell" strategic mindset seems to me a major issue for minority shareholders. Although it can be, that Mubadala is just waiting for a higher price to sell - and the IPO allows it to increase the price.
Mubadala has no strong incentive to make GFS profitable in the foreseeable future: for this you need to raise prices for customers, which will hit hard on the pockets of Western companies. We've already figured it out, that GFS is needed in the West not for, to make GFS itself profitable, and for that, to provide the West with a sufficient amount of semiconductor raw materials at affordable prices.
So the company can remain unprofitable indefinitely, which can negatively affect its quotes. However, probably, quotes will be maintained at the level, high enough, to encourage investment in this area.
But in general, I see a considerable potential for conflicts between minority shareholders and the Arab owners of the company - and Mubadala can make the most of the possibilities of the Cayman registration to infringe on the interests of minority shareholders.. But will it be, will become clear only some time after the IPO.
Concentration. The structure of the company's revenue is dominated by its two largest customers: AMD accounts for 21% proceeds, and Qualcomm — 11%. Changing relationships with one of them can negatively affect the company's bottom line.
Logistics. Shareholders of the company should be mentally prepared for the growth of logistics costs in the company's reporting: this is the time in the world.
The company also has a high concentration among suppliers: the main raw material of GlobalFoundries is silicon wafers of a certain type (KNI) — i 52% one company supplies these materials to GFS. Deliveries may well be disrupted - with negative consequences for reporting.
Debts. The total debt of the company is approximately $ 5.464 billion., of which 3.317 billion it will need to repay during the year. However, she doesn't have much money at her disposal.: 804,6 million on accounts and 1.129 billion debts of counterparties.
Certainly, the company from the IPO will receive approximately 1.5 billion, but, given its unprofitability and the exacting nature of its industry for large capital investments, I would expect that, that the high level of indebtedness will remain. And now, when everyone is waiting for higher rates and more expensive loans, this is not a good characteristic for the company, which may well scare off many investors.
On the other hand, the genesis of the company discussed above and the strategic importance of, what does she do, can provide her access to loans at sane interest.
Today the deficit, and tomorrow a surplus. It may turn out like this, that GFS and its colleagues will produce a lot of plates - the market will suddenly become an oversupply and prices will fall along with the margins of the business. Considering, that GFS has problems with marginality even now, the likelihood of a crisis of overproduction cannot but worry.
Resume
GFS is an interesting company. But the speculative mood of investors and political considerations play a much larger role in her case., rather than the actual merits of GFS itself as a business. Therefore, you can participate in an IPO and invest in these shares, only realizing that, that GFS is definitely not the new TSMC.
