Trade Restrictions And Oversupply Will Erode Semiconductor Margins

Key Takeaways

• Localization and protectionist policies threaten GlobalWafers' market access, increase costs, and may force inefficient investments in capacity.
  
• Industry shifts toward alternative materials and oversupply risk compress margins, eroding profitability and clouding future earnings potential.
  
• Expansion into localized supply chains, robust long-term agreements, government incentives, and a strong balance sheet position GlobalWafers for sustained growth and financial resilience.

Catalysts

Researches, develops, designs, manufactures and sells semiconductor ingots and wafers in Taiwan and internationally.

• Intensifying geopolitical tensions and escalating trade restrictions, such as potential new U.S. tariffs on imported wafers and semiconductor-grade polysilicon, threaten to fragment the global supply chain and restrict GlobalWafers' market access, resulting in a structurally lower growth trajectory for international revenues and rising compliance costs that could significantly erode net margins over time.
  
• The accelerating trend toward localization and onshoring of semiconductor supply chains, combined with government-led industrial policy in major economies, exposes GlobalWafers to the risk of losing market share in key regions and could force the company into unfavorably high capital expenditures for redundant capacity, ultimately reducing free cash flow and depressing long-term return on invested capital.
  
• The rapid commoditization and prolonged oversupply cycles in the silicon wafer industry, especially in mature nodes and legacy products, are likely to exert persistent downward pressure on average selling prices, directly undermining gross margins and making sustainable earnings growth more difficult, even as input costs remain elevated.
  
• GlobalWafers faces a high possibility of margin compression due to heavy reliance on a handful of large customers, who may further vertically integrate or diversify suppliers in response to industry uncertainty, amplifying volatility in earnings and weakening the company's ability to lock in premium pricing through long-term agreements.
  
• The rise of alternative materials (such as SiC and GaN) and slower-than-anticipated volume and pricing recovery in advanced wafer segments could significantly reduce the company's addressable market, especially as price erosion in silicon carbide already outpaces cost reductions, leading to structurally weaker profitability in specialty product lines and casting doubt on GlobalWafers' future earnings power.

GlobalWafers Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on GlobalWafers compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming GlobalWafers's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.3% today to 16.0% in 3 years time.
• The bearish analysts expect earnings to reach NT$11.8 billion (and earnings per share of NT$24.72) by about August 2028, up from NT$6.6 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, down from 26.1x today. This future PE is lower than the current PE for the TW Semiconductor industry at 28.9x.
• 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 10.74%, as per the Simply Wall St company report.

GlobalWafers Future Earnings Per Share Growth

Risks

• GlobalWafers is successfully executing a significant global expansion, including new facilities in the U.S., Italy, Japan, Taiwan, and Denmark, with a large portion of capacity secured under long-term agreements; this positions the company to benefit from supply chain localization trends and stabilizes future revenue.
  
• Customer demand for advanced nodes and specialty wafers remains robust, with utilization rates above 90% for 12-inch products and strong growth expected in advanced node technologies below 7 nanometers, supporting continued topline growth and margin improvement as high-value products represent a higher share of sales.
  
• Over 50% of revenue in the first half of 2025 came from long-term agreements, providing strong revenue visibility, supporting profitability, and cushioning the company against short-term market volatility.
  
• Receipt of substantial government subsidies, along with expected ongoing incentives such as increased U.S. tax credits on expansionary investments, will reduce depreciation and improve both cash flow and net margins, further enhancing financial resilience.
  
• The company maintains a healthy balance sheet with significant cash reserves, declining net debt, and improved liquidity ratios, putting it in a strong position to weather industry cycles and finance future growth, thus reducing risks to earnings and supporting shareholder value.

Valuation

• The assumed bearish price target for GlobalWafers is NT$294.57, which represents two standard deviations below the consensus price target of NT$405.81. This valuation is based on what can be assumed as the expectations of GlobalWafers's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$488.0, and the most bearish reporting a price target of just NT$290.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NT$74.1 billion, earnings will come to NT$11.8 billion, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 10.7%.
• Given the current share price of NT$358.5, the bearish analyst price target of NT$294.57 is 21.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.