Malta's Fab 8 Technology Transfer Will Diversify Portfolio And Strengthen Customer Relationships

Key Takeaways

• Strategic initiatives, including essential tech transfer to Fab 8 and government-supported advanced capabilities, aim to diversify technology and meet growing chip demand, enhancing revenue.
  
• Improvement in operational efficiency, advanced technology, and high-margin design wins are set to boost gross margin and grow free cash flow, positively impacting earnings.
  
• Asset impairments, weak demand in key segments, platform transitions, and geopolitical uncertainties threaten GlobalFoundries' profitability and market stability.

Catalysts

A semiconductor foundry, provides range of mainstream wafer fabrication services and technologies worldwide.

• The company's strategic initiatives in Malta, including the transfer of essential chip technologies into their Fab 8 facility, are expected to diversify their technology portfolio and strengthen customer relationships, potentially driving future revenue growth.
  
• Advanced packaging and photonics capabilities in Malta, supported by government grants, aim to meet growing U.S. demand for chips in AI, automotive, aerospace, and defense, which should enhance revenue and profitability as these markets expand.
  
• A record level of design wins across automotive markets is projected to grow automotive revenue similarly to 2024's 15% year-over-year growth, with expectations of increased chip content in vehicles, likely boosting overall revenue.
  
• The strategic focus on communications infrastructure and data centers supports long-term growth prospects, as design wins in areas like optical transceivers and satellite communications may result in significant revenue increases due to increasing demand.
  
• With improved operational efficiency, advanced technology implementation, and high-margin design wins, the company is set to increase its gross margin and grow adjusted free cash flow above $1 billion in 2025, positively impacting net earnings.

GlobalFoundries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming GlobalFoundries's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -3.9% today to 16.4% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $2.62) by about March 2028, up from $-265.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.1x on those 2028 earnings, up from -83.4x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.1x.
• Analysts expect the number of shares outstanding to decline by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.79%, as per the Simply Wall St company report.

GlobalFoundries Future Earnings Per Share Growth

Risks

• The company's net PP&E was reduced by 13% in Q4 2024 due to a significant impairment charge, which suggests potential issues with asset utilization and long-term investments, impacting future profitability and depreciation expenses.
  
• Despite reaching new records in automotive revenue, there is concern about soft end market demand and inventory builds at OEMs, which could affect future revenue growth in this segment.
  
• In the smart mobile device market, despite slight revenue growth, the environment remains challenged by elevated inventory levels and soft consumer demand, which could limit revenue growth.
  
• The communications infrastructure and data center end market has experienced prolonged platform transitions, contributing to a 33% decline in annual revenue in 2024, highlighting risks of technology shifts impacting future revenue streams.
  
• Uncertainty regarding geopolitical tensions and reliance on China for certain aspects of the supply chain, coupled with competitive pressures, could pose risks to revenue stability and market positioning.

Valuation

• The analysts have a consensus price target of $47.806 for GlobalFoundries 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 $65.0, and the most bearish reporting a price target of just $38.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.5 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $40.0, the analyst price target of $47.81 is 16.3% 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.