GlobalFoundries Earnings: Near-Term Headwinds Look Manageable, Shares Fairly Valued

No-moat GlobalFoundries GFS reported first-quarter results consistent with our expectations. While management reiterated its view that the first quarter would be the low point of revenue for 2023, it now anticipates a slower recovery to normalized inventory and demand levels than previously expected. We view this more conservative outlook as more in line with our estimates, as we have been skeptical of a sharp recovery in demand in the second half of 2023 given assorted macroeconomic headwinds. Although we now expect GlobalFoundries’ revenue to decline about 4% in 2023 (versus up modestly previously), we model a stronger recovery in 2024 and thereafter. Shares fell nearly 7% following the release of the results and now trade close to our unchanged fair value estimate of $55.

First-quarter revenue fell 5% year over year to $1.8 billion as a decline in wafer shipments (down 18%) was partially offset by strong average selling prices (up 12%). Smart mobile sales were $696 million, down 29% year over year, due to weakness in low- to mid-tier smartphones and the ongoing inventory correction in the broader smartphone market. We see this segment being under duress over the next several quarters. Communication infrastructure and data center revenue grew 8% year over year to $352 million, but was down 9% sequentially due to softening enterprise spending, which we see persisting into the second quarter.

Internet of Things sales grew 7% year over year to $344 million, with strength in aerospace and defense. We expect these two end markets to offset weakness in consumer-centric areas of IoT. Automotive sales were $180 million during the quarter, up 122% year over year, led by processing, sensing, and vehicle infrastructure technologies. Although it only accounts for 10% of revenue, we expect this segment to more than double in 2023 thanks to ongoing growth in chip content in vehicles to support the shift to EVs and more autonomous functionality.