4 Reasons GlobalFoundries Could Be a Big Winner After Recent Lows

Key Points

• GlobalFoundries is a New York-based semiconductor foundry that produces chips for AMD, Broadcom, Qualcomm, Cirrus Logic, and NXP Semiconductors.
• GlobalFoundries only makes ‘essential chips’ that power everyday devices like smartphones, TVs, appliances, and cars.
• GlobalFoundries noted that Q1 2024 was the low point of revenues for 2024 and Q3 2024 should continue its improvement.

GlobalFoundries Inc. NASDAQ: GFS is a leading global semiconductor foundry that manufactures chips designed by its clients, mostly semiconductor companies. GlobalFoundries was originally a subsidiary of Advanced Micro Devices Inc. NASDAQ: AMD but was spun off because it was more cost-effective to outsource leading-edge chip production to Taiwan Semiconductors Manufacturing Co. Ltd. NYSE: TSM.

GlobalFoundries semiconductor clients design the chips and outsource production to GlobalFoundries. The company makes chips for smart mobile devices, automobiles, the Internet of Things (IoT), aerospace and defense, and data centers. Some of its well-known customers include Qualcomm Inc. NASDAQ: QCOM, Broadcom Inc. NASDAQ: AVGO, Cirrus Logic Inc. NASDAQ: CRUS, and NXP Semiconductors Inc. NYSE: NXP.

The computer and technology sector company naturally competes with other semiconductor foundries, including Taiwan Semiconductors Manufacturing and Intel Co. NASDAQ: INTC.

GlobalFoundries stock has recently fallen to new 52-week lows, setting up a buying opportunity for risk-tolerant investors. Here are four reasons to buy the dip.

1) GlobalFoundries Only Produces Essential Chips

GlobalFoundries pivoted in 2018 to focus on producing "essential chips." These are created on the 12 nanometers (NM) node used for essential tasks like connectivity, power management, and sensors found in smartphones, laptops, gaming consoles, wireless networks, radars, advanced driver assistance systems (ADAS), and electronic vehicles (EVs). Since they aren't competing with Taiwan to produce cutting-edge artificial intelligence (AI) chips for NVIDIA Co. NASDAQ: NVDA, their research and development (R&D) costs are significantly lower, lending to higher margins.

While cutting-edge chips can fuel top-line growth, essential chips will always be needed to power everyday devices like smartphones and household appliances. Demand for mature nodes in everyday electronics is steady. GlobalFoundries' largest end market revenue segment is smart mobile devices, which account for 47% of total revenues, followed by home and industrial IoT, which accounts for 18%; automotive, which accounts for 17%; and communications and data centers, which account for 9%.

2) GlobalFoundries Indicated the Bottom Is In

The worldwide semiconductor shortage during the pandemic led to massive overproduction and a worldwide semiconductor inventory glut. After years of working through inventories, the bottom may finally be in, according to GlobalFoundries. The company noted that Q1 2024 may mark the low point for sales in 2024 as improvements accelerate into Q3 2024. Its second quarter of 2024 revenues fell 11% YoY to $1.63 billion, and they rose sequentially over Q1 2024 revenue of $1.55 billion. GlobalFoundries indicated that China's recovery may be uneven, but interest rate cuts in the United States could facilitate more robust demand across consumer applications. Since then, the U.S. Federal Reserve has cut interest rates by 50 bps.

3) AI Is Driving Demand in Power Management

While GlobalFoundries doesn’t make AI chips, the AI revolution is causing the need for next-generation power management chips. AI applications can require 200% to 300% more electricity to operate seamlessly. The migration to EdgeAI or AI on the Edge means AI needs to be processed on smartphones, laptops, desktops, and mobile devices. This will require next-generation power management architecture like ARM Holdings plc NASDAQ: ARM v9 architecture and chips. Power management improvements for everyday devices will need to be more efficient.

GlobalFoundries acquired Tagore Technology’s gallium nitride (GaN) power business and its extensive IP portfolio to bolster its power management capabilities. This unit specializes in developing next-generation high-power density solutions, expanding the boundaries of performance and efficiency in power applications. GlobalFoundries expects its newly addressable market to grow by $1.6 billion by 2030 just from the benefits of the acquisition.

4) GFS Stock May Be Forming a Rounding Bottom With a 46% Upside Price Target

After making a swing low and gradually forming higher lows, a rounding bottom forms, forming a bowl-shaped curve. The stock starts to accelerate as it moves higher back up to the cup lip line.

GFS formed a swing high and lip line at $47.52. Shares fell to hit 52-week lows at $38.49 as it gradually attempted to build a cluster of higher lows. The daily relative strength index (RSI) is stalled around the 37-band. Fibonacci (Fib) pullback support levels are at $38.49, $36.05, $34.75, and $32.91.

GlobalFoundries average consensus price target is $56.90, and its highest analyst price target is $71.00.  

Bullish risk-tolerant investors can enter on pullbacks using cash-secured puts at the fib pullback support levels to buy the dip.  

By implementing a bullish call debit spread, bullish options investors can limit the downside and profit from modest upside gains for less capital than owning the stock.