On Monday, Morgan Stanley (NYSE:MS) downgraded GlobalFoundries Inc. (NASDAQ:GFS) stock from Overweight to Equalweight, adjusting the price target to $43.00 from the previous $53.00. The decision comes as the semiconductor market faces a slower recovery and more competitive challenges.
The firm acknowledges GlobalFoundries' strategic advantage, especially given that roughly 40% of its capacity is located in Asia and more than 70% of its revenue comes from mobile/IoT sectors. These sectors have historically been less impacted by geopolitical tensions. Despite this, the company is not entirely shielded from the global overcapacity issues plaguing the industry.
GlobalFoundries has been recognized for its performance in the automotive sector, a segment where it has previously excelled. However, Morgan Stanley now expresses caution regarding the growth rate of the Total Addressable Market (TAM) in automotive, suggesting that the company may need to rely more on market share gains to sustain growth.
The analyst's remarks reflect a tempered view of GlobalFoundries' prospects. While the company's strategic positioning is still seen as beneficial, the lack of upward pressure on earnings per share (EPS) estimates makes it difficult to foresee a reversal in valuation in the near term.
Morgan Stanley's update comes after considering the second-quarter results, which indicate that the premium valuation GlobalFoundries enjoyed post-IPO has decreased. The current market dynamics and competitive landscape are significant factors in the firm's reassessment of the stock's outlook.
In other recent news, GlobalFoundries and NXP Semiconductors (NASDAQ:NXPI) have announced a collaboration to optimize power and performance of NXP's products, utilizing GlobalFoundries' 22FDX® process technology. This partnership is expected to facilitate compact and energy-efficient solutions, particularly beneficial for Edge AI processors and Automotive Grade 1 and 2 applications.
In financial news, GlobalFoundries reported strong Q2 revenues of $1.632 billion, despite a 12% year-over-year decrease. The company shipped about 517,300-millimeter equivalent wafers, maintaining a steady average selling price per wafer. TD Cowen recently adjusted its outlook on GlobalFoundries, lowering the price target from $65.00 to $55.00 but maintaining a Buy rating.
The firm projects an improvement of approximately 70 basis points in the core GM for the third quarter due to higher unit sales. GlobalFoundries expects Q3 revenue to be between $1.7 billion and $1.75 billion and forecasts a revenue-high water mark of $8.1 billion or $8.2 billion in 2022. These are the recent developments in the semiconductor industry.
Recent InvestingPro data aligns with Morgan Stanley's cautious stance on GlobalFoundries (NASDAQ:GFS). The company's revenue growth has declined by 12.39% over the last twelve months, with a 11.54% drop in the most recent quarter. This trend supports the analyst's concerns about slower recovery in the semiconductor market.
InvestingPro Tips highlight that 11 analysts have revised their earnings downwards for the upcoming period, and net income is expected to drop this year. These insights corroborate Morgan Stanley's view on the lack of upward pressure on EPS estimates.
Despite these challenges, GlobalFoundries maintains a strong position in the industry. The company is profitable, with a P/E ratio of 25.63, and operates with a moderate level of debt. Its liquid assets exceed short-term obligations, providing some financial stability amidst market uncertainties.
For investors seeking a more comprehensive analysis, InvestingPro offers 10 additional tips for GlobalFoundries, providing a deeper understanding of the company's financial health and market position.
