Record Design Wins And Malta Expansion Will Unlock Opportunities

Key Takeaways

• Record design wins in automotive, satellite communications, and data centers signal strong potential for revenue and topline growth.
  
• High-margin chip focus, supply chain resilience, and cost structure optimization drive profitability and market share growth.
  
• Revenue declines and inventory challenges across key segments indicate potential profitability issues if current trends in pricing and market dynamics persist.

Catalysts

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

• GlobalFoundries is expected to achieve significant revenue growth through record design wins across key end markets, including automotive, satellite communications, and data centers, which should translate to increased topline growth as these markets expand.
  
• The company anticipates increased net margins by focusing on high-margin essential chip technologies, which are in high demand for applications in AI, automotive, and aerospace, contributing to greater profitability.
  
• Strategic initiatives to diversify and enhance the capacity of its Malta facility are set to expand production capabilities, which could enhance operational efficiencies and contribute to improved earnings.
  
• Long-term partnerships and collaborations to build resilience in the supply chain, such as U.S.-based strategic manufacturing, are likely to boost GlobalFoundries' market share, driving revenue and margin growth.
  
• A focused plan to optimize cost structures, coupled with capital-efficient operations and government incentives, is expected to significantly enhance free cash flow generation, supporting future profitability and investment in growth areas.

GlobalFoundries Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on GlobalFoundries compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming GlobalFoundries's revenue will grow by 8.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -3.9% today to 18.7% in 3 years time.
• The bullish analysts expect earnings to reach $1.6 billion (and earnings per share of $2.95) by about April 2028, up from $-265.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 25.7x on those 2028 earnings, up from -66.2x today. This future PE is greater than the current PE for the US Semiconductor industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.28%, as per the Simply Wall St company report.

GlobalFoundries Future Earnings Per Share Growth

Risks

• The company experienced a 9% year-over-year decline in full-year revenue in 2024 due to a prolonged industry downturn and weak economic conditions, which could impact future revenue stability.
  
• Average selling prices per wafer decreased by approximately 5% year-over-year due to changes in product mix, potentially affecting revenue and profitability if pricing pressures continue.
  
• A $935 million impairment charge on long-lived assets related to legacy investments at the Malta facility indicates potential mismatches in capacity and technology alignment, which could affect future earnings and net margins.
  
• The fourth quarter showed a decline in the smart mobile devices segment revenue by approximately 4% year-over-year, primarily due to ASP declines, raising concerns about revenue growth in a key segment.
  
• Inventory challenges persisted in the IoT market with a 21% year-over-year decline in revenue due to customers managing elevated inventory levels, which could continue to influence revenue and net margins if inventory adjustments do not stabilize.

Valuation

• The assumed bullish price target for GlobalFoundries is $58.73, which represents two standard deviations above the consensus price target of $45.76. This valuation is based on what can be assumed as the expectations of GlobalFoundries's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• 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 $35.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $8.7 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 25.7x, assuming you use a discount rate of 9.3%.
• Given the current share price of $31.71, the bullish analyst price target of $58.73 is 46.0% 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.