Shift To Automotive MOSFETs And Silicon Carbide Will Strengthen Market Position

Key Takeaways

• Capacity expansion and product pipeline growth will enhance revenue and margins as utilization improves, driven by demand and focus on automotive MOSFETs.
  
• Transition to specialized high-demand technologies for automotive, industrial, and medical markets is expected to support steady revenue and improved earnings.
  
• Weakness in automotive inventory corrections and decreased liquidity from CapEx payments pose risks to revenue, cash flow, and earnings stability.

Catalysts

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

• The capacity expansions at the 180-nanometer CMOS line, aided by strong demand and new product pipelines, will drive revenue growth and potentially higher margins as utilization improves.
  
• The transition to producing automotive-focused MOSFETs and systems will capitalize on growing demand in the automotive sector, enhancing both revenue and net margins due to its premium pricing.
  
• The completion of major CapEx spending will lead to a decrease in capital expenditures, allowing for improved cash flow from the second half of 2025, positively impacting net earnings.
  
• The growth in the China automotive market, particularly with major EV brands, is expected to continue and accelerate, boosting revenue and possibly increasing net margins due to economies of scale.
  
• The shift in product focus towards specialized and high-demand technologies like silicon carbide and microsystems for industrial and medical markets is expected to support steady revenue growth and improve overall earnings.

X-FAB Silicon Foundries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming X-FAB Silicon Foundries's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 12.5% in 3 years time.
• Analysts expect earnings to reach $128.2 million (and earnings per share of $1.03) by about March 2028, up from $61.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $142.9 million in earnings, and the most bearish expecting $113 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.4x on those 2028 earnings, down from 10.4x today. This future PE is lower than the current PE for the GB Semiconductor industry at 14.8x.
• 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 10.75%, as per the Simply Wall St company report.

X-FAB Silicon Foundries Future Earnings Per Share Growth

Risks

• Weakness in CMOS 350-nanometer due to automotive inventory corrections could result in lower capacity utilization, impacting revenue and earnings.
  
• The automotive supply chain is undergoing inventory reductions, particularly affecting the 350-nanometer segment, leading to short-term revenue loss not yet compensated by the 180-nanometer growth.
  
• Cash and cash equivalents decreased by 32% in the fourth quarter, largely due to CapEx payments, impacting available liquidity and potentially constraining growth initiatives.
  
• The completion of the CapEx expansion brings uncertainty on returning to positive cash flow in the second half of 2025, posing risks to earnings stability in the near term.
  
• Negative net income in the fourth quarter due to a non-cash deferred tax asset adjustment underscores potential volatility in financial performance, influencing net margins and investor confidence.

Valuation

• The analysts have a consensus price target of €6.286 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 €7.05, and the most bearish reporting a price target of just €5.02.
• 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 $128.2 million, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 10.8%.
• Given the current share price of €4.52, the analyst price target of €6.29 is 28.2% 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.