Raised Data Center Outlook and Gross Margin Expansion Provide Support, While Smartphone Headwinds Limit Near-Term Flexibility

Overview

GlobalFoundries' quarterly revenue and non-IFRS EPS were broadly in line with market expectations, while gross margin was meaningfully better than expected. Data center and communications infrastructure became the most prominent company-specific growth engine, with design wins in silicon photonics, silicon germanium, and optical networking driving management to raise its 2026 growth outlook; meanwhile, smartphone demand weakened further. A favorable product mix, optimized capacity footprint, and improved utilization drove year-over-year gross margin expansion, but business growth has not yet shown broad-based upside, so Goldman Sachs expects the stock may remain range-bound in the near term.

Core views

The core view is that the data center and automotive businesses can provide medium- to long-term growth support through new design wins, demand for US-based manufacturing, and longer product cycles, with silicon photonics having the greatest growth potential. The company's gross margin improvement has some sustainability and can continue to benefit from a higher proportion of high-margin products, acquisitions in intellectual property and product businesses, and fab optimization. However, smart mobile devices and the consumer and IoT businesses still face demand, pricing, and inventory pressures. Until broader revenue upside emerges and is sufficient to significantly lift earnings power, the current Neutral rating remains unchanged.

Analysis framework

The report compares actual revenue, segment revenue, gross margin, and EPS against Goldman Sachs forecasts and consensus expectations, respectively, and assesses near-term earnings trends in combination with next-quarter guidance; it then identifies growth differences across data center, automotive, and smartphone end-market segments, explains changes in gross margin through product mix, capacity utilization, and fab optimization, and finally derives the target price using normalized EPS and a P/E multiple.

Methodology notes

• Earnings AnalysisActuals vs. Expectations Variance Analysis

  Compare actual results and next-quarter guidance item by item against institutional forecasts and consensus expectations.

  Quarterly revenue was roughly in line with expectations, and gross margin was above expectations; next-quarter revenue guidance was broadly in line with market expectations, and EPS guidance was also close to market expectations.

• Fundamental AnalysisSegment Growth Driver Analysis

  Break down growth drivers and pressures by end markets such as data center, smart mobile devices, automotive, and home and industrial IoT.

  Data center and silicon photonics contributed the main incremental growth, while worsening smartphone demand was an offsetting factor; automotive revenue for the quarter was below Goldman Sachs' forecast.

• Profitability AnalysisProduct Mix and Capacity Utilization Analysis

  Explain gross margin through product mix, capacity footprint, operational improvements, and utilization changes.

  Higher contributions from data center and automotive, optimized capacity footprint, and improved utilization drove year-over-year gross margin expansion of 470 basis points to 29.9%.

• Valuation methodsP/E Target Price Method

  Apply a target P/E multiple to normalized EPS.

  The $70 target price is based on normalized EPS of $2.80 and a 25x P/E multiple.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• GlobalFoundries Inc. (GFS.US)

  US-listed semiconductor foundry company directly covered by the report

  Strengths

  Growth in data center and communications infrastructure is accelerating, with strong demand for silicon photonics and silicon germanium capacity; product mix improvement, optimized capacity footprint, and higher utilization are driving gross margin expansion; US-based manufacturing capability has strategic value.

  Weaknesses

  Smartphone business demand continues to deteriorate, the automotive business was below Goldman Sachs' expectations this quarter, and the consumer and IoT markets remain affected by pricing and inventory pressures.

  Comparison

  Total revenue for the quarter was broadly in line with market expectations, but gross margin, the data center business, and home and industrial IoT revenue were better than expected; automotive and non-wafer revenue were weaker relative to Goldman Sachs' forecasts.

  Risks

  Further declines in smartphone demand, pricing pressure in mature process nodes, lower scale of long-term agreements, failure of business growth to broaden into more segments, and silicon photonics ramp-up or capacity optimization progressing below expectations.

Key data

• Quarterly revenue$1.79 billionGoldman Sachs forecast was $1.78 billion, and market expectation was $1.77 billion.
• Quarterly gross margin29.9%Above Goldman Sachs' forecast of 29.4% and market expectation of 28.6%, up 470 basis points year over year.
• Quarterly non-IFRS EPS$0.46Close to Goldman Sachs' forecast of $0.47 and above the market expectation of $0.43.
• Data center and communications infrastructure revenue$277 millionAbove Goldman Sachs' forecast of $246 million and market expectation of $249 million.
• 2026 data center and communications infrastructure growth outlook50%–60%The previous outlook was for growth of close to 40%.
• Long-term silicon photonics targetAnnualized revenue of more than $1 billion by the end of 2028Management also expects silicon photonics revenue to more than double again in 2026.
• Smart mobile devices revenue$644 millionUp approximately 15% quarter over quarter and down 6% year over year, accounting for approximately 36% of total revenue.
• Smart mobile devices business outlookLow-double-digit declineFurther weakened from the previous expectation of a high-single-digit decline.
• Midpoint of next-quarter revenue guidance$1.89 billionSlightly below Goldman Sachs' forecast of $1.93 billion and close to the market expectation of $1.87 billion.
• Next-quarter gross margin guidance30.5%Below Goldman Sachs' forecast of 31.2% and above the market expectation of 29.6%.
• Midpoint of next-quarter non-IFRS EPS guidance$0.51Below Goldman Sachs' forecast of $0.61 and close to the market expectation of $0.50.
• Valuation$70 target priceCalculated using normalized EPS of $2.80 and a 25x P/E multiple; potential upside of 34.6% versus the current price of $52.02.

Impact & implications

In the near term, results and guidance were roughly in line with expectations, and investors' prior optimism about silicon photonics growth is also constrained by weakness in mobile devices, so the stock may remain range-bound. Over the medium to long term, if data center design wins continue to convert, silicon photonics ramps as planned, and gross margin steadily breaks above 30%, the company's earnings power could exceed current expectations; however, if growth remains limited to a few segments, realization of the higher target valuation will depend on stronger and broader revenue upside.

Risks

• Continued demand destruction in the smartphone market could cause smart mobile devices revenue to decline more than the current low-double-digit expectation.
• Price compression in mature process nodes could weaken revenue and gross margin improvement.
• A decline in the scale of customer long-term agreements could affect capacity utilization and revenue visibility.
• If data center growth is overly concentrated in a small number of products or customers, it may be difficult to generate broad-based earnings upside.
• Inventory adjustments and weak end demand in the automotive, consumer, and IoT businesses could prolong the recovery cycle.
• There are execution risks related to conversion of silicon photonics design wins, capacity expansion, and the 2028 revenue target.

What to watch

• Whether 2026 data center and communications infrastructure revenue can achieve the 50%–60% growth outlook.
• Whether silicon photonics revenue can more than double again in 2026 and reach an annualized run rate of more than $1 billion by the end of 2028.
• The mass-production progress of seven new optical networking design wins and the revenue conversion of projects with three leading pluggable optical transceiver manufacturers.
• Whether the smart mobile devices business can halt its low-double-digit decline and whether smartphone end-market demand improves.
• Whether the next-quarter gross margin guidance of 30.5% can be achieved, and whether subsequent product mix and fab optimization can drive continued gross margin expansion.
• Whether pricing and inventory pressures in the automotive, consumer, and IoT businesses ease.
• The implementation progress of US manufacturing subsidies and the $300 million Department of Commerce grant.
• Whether the company delivers broader revenue upside, thereby supporting significantly higher EPS capacity.