Semiconductors have become a hot growth area in the tech world, especially as the demand for advanced chips skyrockets due to artificial intelligence (AI). According to the latest industry data, global semiconductor sales rose 4.1% sequentially to $55.3 billion in September 2024, the market's highest-ever monthly total. Plus, Q3 growth of 10.2% relative to Q2 was the largest such increase since 2016.
Leading this charge are foundry giants like Taiwan Semiconductor Manufacturing Company (TSM) and GlobalFoundries (GFS), both of which play key roles in the semiconductor supply chain. The AI boom has only made these foundries more important, as advanced semiconductors are essential to the AI and data center ecosystem. This surge in demand has made foundry operators like TSM and GFS indispensable to fabless semiconductor companies like Nvidia (NVDA) and AMD (AMD), who depend on them for the production of their chips.
As foundries become increasingly essential to the semiconductor industry, both TSMC and GlobalFoundries have delivered solid quarterly results. Let's explore why these two companies are attractive long-term investments in a niche characterized by intense competition and high barriers to entry.
#1. Taiwan Semiconductor Manufacturing Company (TSM)
Taiwan Semiconductor Manufacturing Company (TSM) is basically the biggest chip maker in the world, making advanced chips for major tech companies. They don't sell directly to consumers - instead, they manufacture chips for giants for designers like Nvidia, who then sell the finished products to customers.
The company's stock has been on fire lately. In the past year alone, it's more than doubled in value, gaining 119%. In 2024 alone, TSM is up 93.8%.
The stock's market capitalization of approximately $1.04 trillion reflects its massive market presence. Trading at a forward price/earnings (P/E) ratio of 28.89, which is slightly below the tech sector median of 30.16, TSM doesn't seem too expensive, given its position within the broader semiconductor ecosystem.
The company's dividend profile is worth additional investor attention. With a forward dividend yield of 1.16% backed by 19 years of consistent payments, TSM provides steady income potential.
TSMC's role as a critical supplier to NVIDIA and other tech giants underscores its importance in the global supply chain. This is reflected in its latest report for the third quarter of 2024, where TSM reported a 39% revenue increase and 54.2% net income growth.
Advanced technologies, including 3nm and 5nm processes, accounted for 69% of total wafer revenue, highlighting TSM's technological leadership. As CFO Wendell Huang noted, the company expects continued strong demand, particularly from AI and smartphone sectors using their leading-edge process technologies.
Strategic expansion continues to be a key growth driver. A recent collaboration with Amkor Technology (AMKR) in Arizona demonstrates TSM's commitment to expanding its semiconductor ecosystem. The partnership will provide advanced packaging and test capabilities, supporting critical markets like high-performance computing and communications.
Analyst sentiment overwhelmingly supports TSM as a strong investment. Of 10 analysts covering the stock, 8 recommend a “strong buy,” 1 suggests a “moderate buy,” and 1 recommends a “hold.” The mean target price of $222.57 represents approximately 10.6% upside from Friday's close.
#2. GlobalFoundries (GFS)
GlobalFoundries (GFS) is the world's third-biggest chip manufacturer, making essential components for cars, planes, and data centers. While not as big as TSMC, they're still crucial to major tech companies, and their global footprint is unique - they have factories across America, Europe, and Asia, which helps them keep in production even when there are problems in one region.
GFS stock has underperformed in 2024, down more than 27% on a YTD basis, but rallied sharply following its recent Q3 financial results.
With a market capitalization of approximately $24.9 billion, GFS stock trades at a forward adjusted P/E of 29.24 - roughly in line with its 5-year average multiple.
For the third quarter of 2024, GlobalFoundries reported robust financial metrics. The company generated revenue of $1.739 billion, with a gross margin of 23.8% and net income of $178 million. The company's non-IFRS adjusted EBITDA reached $627 million, underscoring its operational efficiency.
Looking forward, GFS projected Q4 2024 net revenue between $1.80 and $1.85 billion, signaling cautious optimism about future performance. The company's financial stability is further reinforced by a strong cash position, with $4.3 billion in cash, cash equivalents, and marketable securities. The year-to-date net cash provided by operating activities reached $1.265 billion, demonstrating solid financial management.
Strategic partnerships have been pivotal to GFS's growth strategy. A recent collaboration with NXP Semiconductors (NXPI) leverages GFS's 22FDX process technology to develop next-generation solutions in automotive, IoT, and smart mobile devices. Additionally, their partnership with Silicon Catalyst positions them to support innovative semiconductor startups, potentially accessing emerging markets in IoT, automotive, and generative AI applications.
Analyst sentiment leans toward the bullish end of the spectrum. Of 16 analysts covering GFS stock, 8 recommend a “strong buy,” 1 suggests a “moderate buy,” and 7 recommend a “hold.” The mean target price of $51.92 represents an approximately 18% upside potential from Friday's close.
Conclusion
Both TSM and GFS may be navigating different market dynamics, but their essential roles in the semiconductor supply chain make them solid long-term investments. TSM's leadership in cutting-edge process technologies and GFS's strategic partnerships position them as must-own stocks for anyone looking to capitalize on the future of tech.
