Initiating Coverage of GlobalFoundries; Shares Overvalued Relative to Our $43 Fair Value Estimate

We’ve initiated coverage of GlobalFoundries with a $43 fair value estimate, no-moat rating, and Standard capital allocation rating. As a semiconductor foundry, GlobalFoundries is several generations behind leading-edge chipmakers TSMC, Samsung, and Intel in process technology, in our view. Consequently, it is more prone to bouts of pricing pressure caused by oversupply or reduced demand. The company has yet to be profitable on a GAAP basis, and its gross margins are comparable with no-moat foundries such as UMC and SMIC. We expect GlobalFoundries will be unable to maintain excess returns on invested capital over an extended time frame, even amid the ongoing chip shortage that began in 2020.