GlobalFoundries is the IBD Stock Of The Day as the contract chipmaker benefits from a host of positive trends, including a big backlog of orders due to the global chip shortage. GFS stock rose on Friday.
GlobalFoundries is in the "sweet spot of secular and geopolitical trends," BofA Securities analyst Vivek Arya said in a note to clients this week.
The Malta, N.Y.-based company likely will win a sizable chunk of U.S. government funding from the CHIPS Act, Arya said. The act is meant to spur domestic chip production and bring back manufacturing capability that had been outsourced to Asia.
Arya said GFS stock is his "top pick on the emerging themes of U.S. chip reshoring, supply assurance, and a potential 'hedge' against rising U.S.-China tensions."
Arya rates GFS stock as buy with a price target of 75. On the stock market today, GFS edged down to 60.18.
GlobalFoundries Gaining More Automotive Business
While investors are concerned about the company's currently large exposure to smartphones, its backlog suggests a shift to automotive chips and semiconductors for communications and data centers, Arya said. GlobalFoundries got 49% of its sales from smartphones in the second quarter.
Arya sees auto chip business rising to 12% of its sales mix by 2025 vs. about 5% today. GlobalFoundries' automotive customers include Ford Motor and BMW.
Also, the company's communications and data center business could rise to 21% of sales in 2025 from 17% now, he said. Qualcomm recently signed a contract extension with GlobalFoundries to make 5G wireless transceivers.
GFS Stock In Double-Bottom Base
GFS stock has formed a double-bottom base, according IBD chart analysis. However, a recent pullback in shares has created a handle with a buy point of 66.06. A breaking of the downward trendline of the handle could offer an early entry to aggressive investors.
In a positive sign, most of the high trading-volume days recently have been up days while negative days have been on low volume.
Sales growth at GlobalFoundries is limited by its current production capacity, which is maxed out through 2023.
GlobalFoundries Ranks Fourth In Group
On Aug. 9, GlobalFoundries beat Wall Street's targets for the second quarter and guided higher for the current period. It earned an adjusted 58 cents a share on sales of $1.99 billion in the June quarter. In the year-earlier period, GlobalFoundries lost 6 cents a share on sales of $1.62 billion.
For the current quarter, GlobalFoundries forecast adjusted earnings of 62 cents a share on sales of $2.05 billion. That would translate to year-over-year growth of 786% in earnings and 21% in sales.
GFS stock ranks fourth out of 31 stocks in IBD's semiconductor manufacturing industry group, according to IBD Stock Checkup. It has an IBD Composite Rating of 91 out of 99.
IBD's Composite Rating is a blend of key fundamental and technical metrics to help investors gauge a stock's strengths. The best growth stocks have a Composite Rating of 90 or better.
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