180-Nanometer Expansion And Silicon Carbide Tech Will Fuel Future Success

Key Takeaways

• Capacity expansion and new technology offerings are expected to drive future revenue growth and improve net margins as recovery occurs in key markets.
  
• Decreased capital expenditures following a significant expansion plan will likely enhance cash flow and increase net margins post-2025.
  
• Inventory reductions and slower recovery in key sectors pose risks to X-FAB's revenue stability and profitability amid ongoing financial pressures and strategic adjustments.

Catalysts

Produces and sells analog/mixed-signal IC, micro-electro-mechanical systems, and silicon carbide products automotive, medical, industrial, and communication and consumer worldwide.

• X-FAB's capacity expansion, particularly in the 180-nanometer technology driven by strong demand and expansion in their French factory, is expected to boost future revenue growth, offsetting declines in other areas.
  
• The completion of X-FAB's major CapEx expansion plan will result in significantly decreased capital expenditures, likely improving cash flow and net margins starting from the second half of 2025.
  
• Increased interest in X-FAB's next-generation silicon carbide platform and gallium nitride offerings is anticipated to drive future revenue growth and enhance earnings through new product demand.
  
• The expected recovery of the automotive and medical markets, as inventory levels normalize, suggests future increases in revenue and potential improvements in net margins from these recovering sectors.
  
• Growth in the Chinese automotive market, particularly with major EV brands, is projected to accelerate, potentially increasing overall revenue significantly and contributing positively to earnings.

X-FAB Silicon Foundries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming X-FAB Silicon Foundries's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 12.9% in 3 years time.
• Analysts expect earnings to reach $135.8 million (and earnings per share of $1.03) by about February 2028, up from $61.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 9.9x today. This future PE is lower than the current PE for the GB Semiconductor industry at 14.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.88%, as per the Simply Wall St company report.

X-FAB Silicon Foundries Future Earnings Per Share Growth

Risks

• The downturn in the automotive sector, specifically due to inventory reductions in the 350-nanometer segment, could result in lower revenue as these issues persist into 2025, impacting X-FAB's ability to recover sales margins promptly.
  
• Slower-than-expected recovery in certain segments, such as the silicon carbide within the industrial sector, may affect future revenue and margins if demand does not pick up as anticipated.
  
• The net loss reported for Q4 2024 raises concerns about future profitability, especially since it was influenced by a significant noncash deferred tax asset adjustment, which could affect earnings sustainability.
  
• Ongoing significant capital expenditures, despite plans to reduce them moving forward, have substantially decreased cash reserves and might restrict financial flexibility, putting additional pressure on net margins if returns on these investments are delayed.
  
• Dependence on growth in the 180-nanometer product line to offset losses in other segments might not compensate sufficiently in the short term, posing a risk to revenue stabilization and growth projections if market conditions do not improve as forecasted.

Valuation

• The analysts have a consensus price target of €6.393 for X-FAB Silicon Foundries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €7.03, and the most bearish reporting a price target of just €5.01.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $135.8 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of €4.5, the analyst price target of €6.39 is 29.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.