On Tuesday, Susquehanna downgraded shares of GlobalFoundries Inc. (NASDAQ:GFS) from Positive to Neutral, also reducing the stock price target to $48 from the previous $65. The firm's analyst cited a lack of near-term catalysts and a moderate recovery slope as the primary reasons for the diminished outlook on the semiconductor company.
The analyst noted that while the downside risk to consensus estimates for GlobalFoundries seems limited, the absence of significant catalysts is likely to negatively impact the stock price. The expected improvement in revenue from the first half of 2024 to the second half is seen as modest, leading to a reduction in estimates.
This tempered expectation is due to a combination of factors, including a lack of content growth and diminishing confidence in the company's ability to scale new substrates and products.
In the broader supply chain, competitors are emphasizing their growing contributions from Silicon Photonics (SiPh) as the adoption of 800G Networking is set to accelerate later in the year. In contrast, GlobalFoundries is not seen as capitalizing on this trend.
Moreover, Taiwan Semiconductor Manufacturing Company (TSMC) has become unexpectedly aggressive in the smartphone segment, bundling different types of silicon for various applications, which presents another significant challenge to GlobalFoundries that was not previously anticipated.
As a result of these market dynamics, Susquehanna has revised its earnings per share (EPS) forecast for GlobalFoundries down to $3 by 2026, a decrease from the former projection of $3.50 to $4.00. The updated price target of $48 is based on 16 times the peak EPS and 21 times the revised calendar year 2025 EPS, reflecting lowered growth prospects.
The downgrade comes amid a challenging period for GlobalFoundries, which has seen its stock price decline by 13% year-to-date and 20% from the previous year, in stark contrast to the semiconductor index (SOX), which has risen by 19% year-to-date and approximately 65% from a year ago.
The analyst expressed no pleasure in downgrading the stock during a downturn but emphasized that the earnings potential appears capped at $3 until the company can demonstrate improved execution in terms of content growth and product diversification. The current risk/reward profile, according to Susquehanna, does not justify maintaining a Positive rating.
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