180-Nanometer CMOS Expansion And Capital Completions Will Secure Future Stability

Key Takeaways

• Expansion of 180-nanometer CMOS capacity and global growth initiatives position X-FAB for potential revenue increases in the CMOS and microsystems business.
  
• Demand in automotive, industrial, and data center sectors, along with electrification megatrends, is expected to drive sustainable long-term revenue and margin growth.
  
• Decreasing order backlog, capital expenditure focus, currency fluctuation exposure, sector-specific dependence, and geopolitical risks threaten X-FAB's revenue growth and margin stability.

Catalysts

Develops, produces, and sells analog/mixed-signal IC, micro-electro-mechanical systems, and silicon carbide products for automotive, medical, industrial, communication, and consumer sectors in the Europe, the United States, Asia, and internationally.

• Expansion of the 180-nanometer CMOS capacity and the completion of the global $1 billion expansion program, which supports the growth in the CMOS and microsystems business, positioning X-FAB to potentially increase future revenues.
  
• Strong bookings in automotive and industrial end markets, driven by EV-related applications and last-time-buy announcements on the 150-millimeter CMOS, indicating future revenue growth opportunities.
  
• Growing demand for silicon carbide, particularly in data center applications, which suggests potential future revenue enhancement as market conditions improve.
  
• Megatrends like electrification and advanced sensing technologies expected to drive sustainable demand, likely contributing to long-term revenue growth and increased net margins through diversified product offerings.
  
• The completion of major capital expenditures by mid-2025, which is anticipated to stabilize cash flow and potentially improve net margins as investment-related expenses decrease.

X-FAB Silicon Foundries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming X-FAB Silicon Foundries's revenue will grow by 8.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.3% today to 12.9% in 3 years time.
• Analysts expect earnings to reach $132.9 million (and earnings per share of $1.01) by about May 2028, up from $50.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $116 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.7x on those 2028 earnings, down from 14.3x today. This future PE is lower than the current PE for the GB Semiconductor industry at 15.8x.
• 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 11.12%, as per the Simply Wall St company report.

X-FAB Silicon Foundries Future Earnings Per Share Growth

Risks

• Decreasing backlog from $414 million to $387 million indicates potential challenges in securing future revenue streams as orders stabilize from COVID-19 levels. This could impact future revenue growth.
  
• Significant capital expenditure focus with $102 million already used in the first quarter, leading to a 27% decrease in cash and cash equivalents, which might impact available capital for other strategic investments and could pressure net margins due to higher depreciation costs.
  
• Unrealized foreign exchange losses of $7.2 million indicate exposure to currency fluctuations, which could negatively impact earnings despite natural hedging, particularly if exchange rates remain volatile.
  
• Dependence on automotive and specific applications like EVs and data center power management could limit flexible revenue growth, exposing X-FAB to sector-specific risks that could impact revenue during industry downturns.
  
• Uncertainty around geopolitical tensions and tariffs presents a risk, as they could disrupt global supply chains and material costs, potentially affecting net margins and revenue stability even if indirect effects are noted.

Valuation

• The analysts have a consensus price target of €5.695 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 €6.38, and the most bearish reporting a price target of just €4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $132.9 million, and it would be trading on a PE ratio of 8.7x, assuming you use a discount rate of 11.1%.
  
• Given the current share price of €4.88, the analyst price target of €5.69 is 14.3% 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.