(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

 

NEW YORK - GlobalFoundries picked a great time for its initial public offering. The chipmaker, owned by Abu Dhabi sovereign wealth fund Mubadala Investment, is benefiting from industry capacity shortages and Western countries’ desires to produce semiconductors at home. But it’s plagued by persistent losses and a hoped-for $25 billion valuation, according to Reuters sources, looks a stretch.

The chip industry has largely split into firms that design chips and manufacturing specialists like GlobalFoundries. It hasn’t been a great business, according to financials revealed in its IPO filing on Monday. Revenue declined from 2018 to 2020, and losses totaled over $5 billion during the period.

GlobalFoundries dropped out of the race to produce the smallest, fastest chips, leaving that to Taiwan Semiconductor Manufacturing and Samsung Electronics. Yet the worst recent supply shortages have occurred in so-called lagging-edge chips, used by automobile producers and such, which don’t require blinding speed but are in more and more demand every year. U.S. group Intel predicts chips will make up a fifth of the price of a car in 2030, compared with 4% in 2019. This is GlobalFoundries' sweet spot.

It shows in recent numbers. First-half revenue at the company rose 13% compared with the same period last year to $3 billion, and the firm lost less money. Yet plans to invest $6 billion increasing production in America, Germany and Singapore could fail to produce strong returns if competitors build too much new capacity. Demand for lagging-edge chips could also soften. In the past, users eventually transitioned to smaller chips as they became cheaper.

At $25 billion, GlobalFoundries would be valued at about 5 times historical annual revenue, around half the multiple attached to TSMC. That looks like an appealing discount, even though the Taiwanese group is growing faster and makes good money. On the other hand, it would still be a higher mark than rival foundry United Microelectronics, which is worth nearer 3 times revenue and is profitable.

If a serious buyer like, say, Intel emerged, GlobalFoundries could attract a premium. For an IPO, though, investors want scope for stock-price appreciation. The question is whether the company's bankers manage to persuade them it's more like TSMC than UMC. Floating soon, amid chip shortages and investor optimism, maximizes the chances.

 

CONTEXT NEWS

- GlobalFoundries on Oct. 4 filed a draft prospectus for its planned U.S. initial public offering. The chipmaker, owned by Abu Dhabi’s sovereign wealth fund, Mubadala Investment, has not yet said how many shares it will sell or at what price. Reuters reported in August the company could seek a valuation of about $25 billion.

- Revenue in the first half of 2021 was $3 billion, up 13% from the same period last year. The company lost $301 million in the first half, compared with a loss of $534 million a year earlier.

- In July, the Wall Street Journal reported, citing people familiar with the matter, that Intel was exploring purchasing GlobalFoundries in a deal that could value the company at $30 billion.

- In June, GlobalFoundries said it would invest $6 billion to expand capacity at its factories in Singapore, Germany and the United States.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Richard Beales and Amanda Gomez) ((For previous columns by the author, Reuters customers can click on CYRAN/ SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS http://bit.ly/BVsubscribe | robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))