Within the semiconductor sector, there just happens to be a plethora of options for investors to consider putting new capital to work.
Of course, major high-performance chip makers like NVIDIA (NVDA) and Advanced Micro Devices (AMD) often get a lot of attention as ways to replicate the growing demand for chips, courtesy of AI and other ongoing secular trends. However, there are other relatively overlooked options in this sector that are starting to gain traction as ways to drive growth, particularly within the AI ​​data center space.
One such company that is starting to see an increase in investor interest is GlobalFoundries (GFS). Let’s move on to why some investors are starting to sharpen their pencils on this particular AI stock, following a pretty big announcement the company just unveiled.
GFS stock hasn’t done much over the course of the past year, except perhaps trend lower. There are certainly reasons for this, but again, I would point most readers to the fact that Nvidia and other major chipmakers continue to absorb much of the capital in this sector; Valuations in other key parts of the market, such as those served by the likes of GlobalFoundries, have not kept pace.
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I think that’s a fair assessment of many industries, to be honest. But I also think it’s important to look at the chip sector as a whole. And GlobalFoundries’ silicon photonics platform, used to create precision base alignments, appears to be getting a boost from the company’s recent partnership announcement with Corning (GLW).
In this announcement, the companies presented plans to create next-generation cores that minimize insertion loss and provide the highest performance options for data centers and large-scale customers of high-performance computing applications. The idea is to create a platform that is among the most powerful, with the highest bandwidth, in this sector. The companies are also looking to develop “a vertically coupled fiber-to-PIC (photonic integrated circuit) solution,” which could lead to other FIG-to-fiber connected products in the future. That’s something many investors are intrigued by, given the potential of Corning’s core technologies when integrated with those of GlobalFoundries.
Overall, GlobalFoundries is one of the very few chip-related stocks and I think it is trading attractively right now. At a price earnings (P/E) multiple of less than 27 times (and a forward multiple that is very similar, suggesting that investors believe this company’s future growth rate should remain relatively stable), if we see anything resembling an acceleration of top or bottom line growth, this is a stock that appears well-positioned to take off.
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The company’s valuation multiples shown above also highlight the discrepancy between mega-cap names in the chip sector and those in the middle of the range in terms of overall market caps. One could argue that GlobalFoundries should probably have a much larger multiple than where it is trading right now (see where other top stocks are trading on this front). But even at its current valuation, of course, there is still the potential for downside if investors generally look to eventually shift some of their capital away from this sector and others.
It’s also worth noting that GlobalFoundries’ overall return on equity and return on assets isn’t as attractive as other companies in this space, and the company’s negative profit margin sticks out like a sore thumb. But overall, GlobalFoundries is expected to make a sizable profit this year and beyond, so estimating the magnitude of these numbers is really what most investors are clearly trying to do right now.
The good news for investors who are on the fence with the whole growth versus valuation discussion is that Wall Street analysts appear to be broadly bullish on the name.
As investors will note from the shot above, GlobalFoundries’ consensus price target of $40.67 per share implies upside of around 11% from current levels. That’s not bad. But given the degree to which this stock has been beaten in recent weeks, I’d really like to see analysts have more upside in price as a security blanket to consider jumping on. My sense is that many other market participants feel the same way.
That said, the time to buy a given long-term holding is when no one else really wants to own such a stock. And considering that the low price target on GFS stock on the Street ($35.00) is just below where the company is trading right now, that’s at least some comfort to investors wondering if this stock is reasonably priced right now.
I think GFS stock could be a great long-term pick. That being said, this is a company that I will be monitoring from here and providing updates as they go.
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On the date of publication, Chris MacDonald had no positions (directly or indirectly) in any of the securities mentioned in this article. All information and data in this article are for informational purposes only. This article was originally published on barchart.com
(Tagstotranslate) GlobalFoundries (T) GFS (T) Semiconductor sector (T) Chip sector (T) Investors (T) AI AI stock
