With fears rising that China could potentially cross a geopolitical “red line,” efforts aimed at world stability may go wasted. Still, semiconductor contract manufacturing and design company GlobalFoundries (NASDAQ:GFS) may benefit rather cynically. With the pain of dependencies for critical resources and commodities still fresh, GFS stock should swing higher. I am bullish on the technology enterprise.
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Earlier in February, TipRanks contributor Steve Anderson acknowledged that U.S.-China relations have long been troubled. Unfortunately, the incident involving an alleged spy balloon didn’t help matters at all. Further, it represented an oddity. According to CNN, both U.S. and Chinese officials looked forward to Secretary of State Antony Blinken’s planned visit to Beijing.
Unfortunately, the balloon flight represented a violation of U.S. sovereignty, per government officials. Therefore, Blinken had no other political option than to cancel the meeting, thus signifying the White House’s displeasure.
Just recently, the U.S. ambassador to the United Nations expressed concerns about China possibly providing lethal aid to Russia in its brazen assault on neighboring Ukraine. So far, the Chinese have walked a delicate balance, maintaining diplomatic relations with both Russia and the West. However, Beijing’s outright support for the Kremlin’s war effort would constitute a red line.
For GFS stock, the benefit stems from its underlying relevancies in bolstering U.S. semiconductor infrastructure. By pivoting toward domestic chip production, Americans hope to avoid the disastrous COVID-19 supply-chain disruption, and China’s gamesmanship only emboldens the case for GlobalFoundries.
On TipRanks, GFS stock has a ‘Perfect 10’ Smart Score rating. This indicates strong potential for the stock to outperform the broader market.
GFS Stock to Rise as U.S. Seeks Tech Independence
Naturally, the core issue of geopolitics in Asia centers on Taiwan. According to Voice of America, “Taiwan makes 65% of the world’s semiconductors and almost 90% of the advanced chips.” In contrast, China produces a little over 5% while the U.S. presently produces approximately 10%. Therefore, it’s not so much about China itself. Rather, the U.S. seeks tech independence from China’s potential military leverage.
For years, Beijing consistently stated that Taiwan represents an integral part of its national identity. However, because Taiwan represents a vital cog of the global semiconductor supply chain, a Chinese invasion of the breakaway island could trigger a wide-ranging war. For instance, top Japanese officials stressed the importance of their country defending Taiwan, an unprecedented sentiment.
To be sure, GlobalFoundries won’t change the global semiconductor framework overnight. Nevertheless, GFS stock is attractive. With headlines pointing to greater tensions between the U.S. and China, American policymakers have no other recourse other than to seek chipmaking independence and insulation. Therefore, this dynamic should bode very well for GFS stock.
As well, even if China never invades Taiwan, it may implement other unfavorable actions, such as providing arms to Russia. For the U.S. to diplomatically dissuade such behaviors, it needs increased economic insulation. Moving chip manufacturing in-house will go a long way to extending U.S. diplomatic influence. Again, this makes GFS stock attractive.
Patience is Necessary
As relevant as GFS stock may be under the present environment, it will still require patience for prospective investors. Financially, it presents some decent attributes but also less-than-desirable statistics.
Primarily, the value proposition on paper won’t immediately attract bargain hunters. For instance, the market prices GFS stock at a trailing multiple of 24.1. This ranks worse than nearly 60% of its peers.
Also, GFS stock trades at a forward multiple of 27.6. For this metric, the semiconductor specialist ranks worse than ~65% of the industry.
That said, GlobalFoundries features decent stability in its balance sheet, and regarding its profitability, its net margin stands at 17.9%, outpacing 70.75% of its peers. Also, its return on equity pings at 16.5%, above nearly 66% of the underlying sector.
Is GFS Stock a Buy, According to Analysts?
Turning to Wall Street, GFS stock has a Strong Buy consensus rating based on 11 Buys, one Hold, and zero Sell ratings. The average GFS stock price target is $78.83, implying 22.35% upside potential.
Takeaway: GFS Stock Benefits as the Headlines Worsen
Usually, it’s not a great development when the top two economies of the world clash as they’re doing now. However, for GFS stock, the tensions become a key reason to buy shares of the semiconductor specialist. Essentially, recent controversies only emphasize the need for supply-chain resilience of critical resources. GlobalFoundries can play a meaningful role here, making it an attractive stock to consider for the long term.
