GlobalFoundries' Data Center and Automotive Businesses Drive Growth, Despite Softness in Mobile Devices

Overview

This research report provides a detailed analysis of the latest performance of GlobalFoundries Inc. (GFS.US) and upgrades its price target to $70 while maintaining a neutral rating. The report indicates that data center and automotive businesses have emerged as new growth engines for the company, despite facing certain challenges in the smart mobile device sector. The company's gross margin has significantly improved due to an optimized product portfolio and cost synergies from the AMF acquisition.

Core views

The core views of the report focus on key business segments of GlobalFoundries: 1. Strong performance in data centers and automotive sectors is driving the company's growth. Management anticipates a growth rate of 30%-35% in these areas by 2026, primarily driven by increased demand for silicon photonics and germanium-silicon technologies. 2. Smart mobile device revenue declined by approximately 15%, yet the company performs better than the industry average in the premium segment. 3. Company gross margin has improved by more than 500 basis points year-over-year, largely due to a shift towards higher-margin products and cost synergies from the AMF acquisition. 4. Second-quarter guidance shows revenue meeting expectations but gross margin slightly below Goldman Sachs' prediction. Additionally, the report upgrades EPS estimates for 2026-2028 by an average of about 6% to reflect higher revenue and gross margin assumptions.

Analysis framework

Goldman Sachs analyzes GlobalFoundries' performance through: - Comparing actual financial data against analyst expectations to assess revenue and profit contributions from various business units. - Focusing on how product mix changes impact the company's gross margin, emphasizing the growth potential in data center and automotive sectors. - Assessing challenges in the smart mobile device market and evaluating the company's relative advantages in the premium segment. - Using P/E valuation methodology based on adjusted EPS expectations to calculate the price target. These analytical steps help the firm arrive at a neutral rating and an upgraded price target.

Methodology notes

• Valuation methodsPE/PEG valuation

  Using the price-to-earnings (P/E) method for valuation

  Goldman Sachs calculates the price target using adjusted EPS expectations and peer group comparable P/E multiples. This approach is suitable for assessing the profitability and market expectations of mature companies.

• Industry/Industrial Analysis FrameworkPrice-Volume Decomposition

  Decomposing revenue growth into volume and price components

  By disaggregating revenue contributions from different business units, the analysis identifies growth sources in the data center and automotive sectors and reasons behind declines in the smart mobile device segment.

• Corporate Fundamentals and Financial FrameworkFree cash flow analysis

  Monitoring changes in gross margin and operational efficiency

  Analyzing shifts in product mix and cost synergies explains improvements in gross margin, reflecting enhanced company profitability.

Asset mapping & comparison

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

• GFS.US

  Strong growth in data center and automotive businesses offsets softness in smart mobile devices

  Strengths

  Robust growth in data center and automotive segments; improved gross margin; optimized product mix

  Weaknesses

  Declining smart mobile device revenue; limited premium market share

  Comparison

  Compared to peers, GlobalFoundries shows stronger growth potential in data centers and automotive, but weaker competitiveness in the mobile device market

  Risks

  Fluctuations in smartphone demand; pricing pressures; risk of reduced long-term contracts

Key data

• Price Target$70Based on a 25x P/E multiple and a normalized EPS expectation of $2.80
• Gross Margin29.0%A year-over-year improvement of 100 basis points, primarily driven by favorable product mix
• Revenue from Data Center & Automotive Segments$230 millionA year-over-year increase of 5.4%, exceeding expectations
• Revenue from Smart Mobile Devices Segment$558 millionA year-over-year decrease of 3.5%, though the premium market performed better than the industry average

Impact & implications

Goldman Sachs believes data center and automotive businesses will be the primary growth engines for GlobalFoundries in the coming years, especially given sustained rising demand for silicon photonics and germanium-silicon technologies. However, weakness in the smart mobile device market may continue to exert pressure on the company's overall revenue. Although the gross margin has significantly improved due to product mix optimization, downward risks remain from smartphone demand fluctuations, pricing pressures, and changes in long-term agreements.

Risks

• Weak smartphone demand
• Pricing pressures affecting margins
• Risk of fewer long-term contracts

What to watch

• Growth momentum in data center and automotive segments
• Recovery trend in the smart mobile device market
• Trends in gross margin evolution