GlobalFoundries: Resuming Coverage of U.S. Foundry; Shares Overvalued vs. $45 Fair Value Estimate

We are resuming coverage of GlobalFoundries with a $45 fair value estimate, no-moat rating, Standard Capital Allocation Rating, and High Morningstar Uncertainty Rating. We think the shares are expensive as the market may be too optimistic about GF’s ability to reach its long-term gross margin target of 40%. Unlike bigger competitors, GF’s lack of cutting-edge process technology makes it susceptible to demand and supply shocks, leading to our view that the firm is unlikely to consistently attain excess returns on invested capital versus weighted average cost of capital. We forecast GF to achieve a 5.6% sales compound annual growth rate from 2022 to 2027 by spending an average of $1.5 billion a year on new sites globally. A key upside risk is higher geopolitical tensions that prompt customers to reallocate from East Asia to GF.