GlobalFoundries on Track for Strong Auto Growth in 2023 Despite Macro Headwinds

GlobalFoundries GFS reported fourth-quarter results slightly ahead of our expectations. Despite macroeconomic uncertainty and elevated inventories at many customers, the firm has executed well to improve its profitability, secure long-term agreements with customers, and diversify its end-market exposure with high-quality offerings. We like that 40% of the firm’s customers are under long-term agreements (up from 38% last quarter), with a total value over $27.5 billion, which offers visibility into future revenue growth and increases customer switching costs as more of GlobalFoundries’ sales are single-source revenue (chips that can only be made at GlobalFoundries’ fabs). Specifically, in 2022 about two thirds of the firm’s revenue was single-source.

Management expects macroeconomic and geopolitical uncertainty to weigh on sales in the first half of 2023. We suspect the slowdown could last longer, though we still expect GlobalFoundries to increase its top line in 2023 thanks to new design wins and improved wafer pricing, especially in automotive. We are raising our fair value estimate to $55 per share from $45 as we incorporate a stronger long-term outlook. However, we think shares of no-moat GlobalFoundries look overvalued, as we believe current market prices imply stronger growth and margin expansion than our expectations.

Fourth-quarter revenue grew 14% year over year to $2.1 billion as a decline in wafer shipments (down 7%) was offset by strong average selling prices (ASPs, up 20%). Smart mobile sales were $823 million, down 7% year over year, due to weakness in low to mid-tier smartphones. We see this segment being under duress over the next several quarters, though management thinks it will return to growth in smart mobile in the second half of 2023. Communication infrastructure and data center revenue grew 27% year over year to $386 million, led by increased demand for its networking and data center products.