United Microelectronics vs. GlobalFoundries: Which Semiconductor Foundry Stock is a Better Buy?

United Microelectronics Corporation (UMC) provides circuit design, mask tooling, wafer fabrication, and assembly and testing services. The company operates through Wafer Fabrication and the New Business segment. It serves fabless design companies and integrated device manufacturers. In comparison, GLOBALFOUNDRIES Inc. (GFS) manufactures integrated circuits, which enable various electronic devices that are pervasive. The company manufactures a range of semiconductor devices, including microprocessors, baseband processors, network processors, and microcontrollers.

A semiconductor foundry manufactures chips for companies that design but do not manufacture chips. Semiconductor chips play a vital role in the Internet of Things (IoT) and cloud-enabled technologies that are helping several companies facilitate hybrid working. In addition, the advent of advanced driver-assistance systems, autonomous driving, and decarbonization has escalated the demand for semiconductor chips. While supply constraints impacted the industry, robust demand has allowed companies to raise prices for their chips and generate substantial profits. Furthermore, the growing use of augmented reality (AR) and virtual reality (VR) technologies in various industries are expected to keep driving demand in the semiconductor industry. According to an IMARC Group report, the global semiconductor foundry market is projected to grow at a 7.4% CAGR from 2022 to 2027. Therefore, both UMC and GFS should benefit.

But which of these two stocks is a better buy now? Let’s find out.

Latest Developments

On January 25, 2022, Jason Wang, UMC’s co-president, said, “We will continue to deepen collaboration with customers with our differentiated specialty technologies, manufacturing excellence, and capacity expansions closely linked to the demands of our partners. At the same time, we will keep pushing for cost reduction and meticulously manage our CapEx to deliver sustainable and healthy returns for our shareholders."

On December 23, 2021, GFS announced that it has agreed to amend its Wafer Supply Agreement with AMD to increase the volume of chips it will supply and extend the terms of the agreement to secure supply through 2025. Tom Caulfield, GFS’ CEO, said, "Our amended agreement with AMD is a prime example of our customers' desire and willingness to secure long-term supply.”

Recent Financial Results

UMC’s operating revenues increased 30.5% year-over-year to NT$59.10 billion (US$2.14 billion) for the fiscal fourth quarter ended December 31, 2021. The company’s operating income grew 213.7% year-over-year to NT$17.62 billion ($632.97 million), while its net income came in at NT$15.95 billion ($573.08 million), representing a 42.5% year-over-year increase.

GFS’ revenues increased 56% year-over-year to $1.70 billion for the fiscal third quarter ended September 30, 2021. The company’s adjusted operating profit came in at $81 million compared to a loss of $350 million in the prior-year quarter. Also, its adjusted net income came in at $34 million compared to a loss of $293 million in the year-ago period.

Expected Financial Performance

Analysts expect UMC’s EPS and revenue to increase 25.3% and 20% year-over-year to $1.04 and $9.23 billion, respectively, in fiscal 2022.

In comparison, GFS’ EPS and revenue are expected to increase 16.9% and 1,015.8% year-over-year to $1.74 and $7.66 billion, respectively, in fiscal 2022.

Profitability

UMC’s trailing-12-month revenue is 1.32 times what GFS generates. UMC is also more profitable with a gross profit margin and EBITDA margins of 33.82% and 46.36% compared to GFS’ 7.10% and 20.50%, respectively.

Furthermore, UMC’s ROE and ROTC were 21.85% and 9.84% compared with GFS’s negative values.

Valuation

In terms of forward EV/S, GFS is currently trading at 4.48x, which is 69.7% higher than UMC’s 2.64x. Furthermore, GFS’ 17.23x forward EV/EBITDA ratio is 213.8% higher than UMC’s 5.49x.

So, UMC is relatively affordable here.

POWR Ratings

UMC has an overall rating of A, which equates to a Strong Buy in our proprietary POWR Ratings system. In comparison, GFS has an overall C rating, which translates to Neutral. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

UMC has a B grade for Value, consistent with its 8.81x forward EV/EBIT, 52.2% lower than the 18.42x industry average. However, GFS has a C grade for Value, which is in sync with its 497.36x forward EV/EBIT, significantly higher than the 18.42x industry average.

Moreover, UMC has a grade of B for Quality. This is justified given UMC's 26.19% trailing-12-month net income margin, 305.5% higher than the industry average of 6.46%. On the other hand, GFS has a Quality grade of C, in sync with its negative trailing-12-month net income margin, compared to the industry average of 6.46%.

Of the 100 stocks in the A-rated Semiconductor & Wireless Chip industry, UMC is ranked #8. In contrast, GFS is ranked #83.

Beyond what I have stated above, we have also rated the stocks for Sentiment, Momentum, Growth, and Stability. Click here to view all the UMC ratings. Also, get all the GFS ratings here.

The Winner

The semiconductor industry is expected to continue snowballing with increasing government and private investments. While both UMC and GFS are expected to benefit, we think UMC is a better investment now because of its lower valuation and higher profit margin.

Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the other top-rated stocks in the Semiconductor & Wireless Chip industry here.

GFS shares were trading at $54.83 per share on Monday afternoon, up $2.76 (+5.30%). Year-to-date, GFS has declined -15.61%, versus a -5.24% rise in the benchmark S&P 500 index during the same period.

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles.

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