GlobalFoundries (GFS.US) receives US and Japan support to expand US capacity; Morgan Stanley: asset-light expansion expected to boost profitability.

Morgan Stanley released a research report on October 15 stating that GlobalFoundries (GFS.US) has been selected as the technology provider and operator for two new 300mm fabs at its Malta, New York campus. Japan will provide up to $21 billion in funding for the project under the US-Japan trade agreement. In addition, the US CHIPS Program Office will reallocate $955 million previously awarded to GlobalFoundries, directing it toward R&D and capital expenditures starting in 2027, and the US Department of Commerce will receive approximately 4% equity in GlobalFoundries. Morgan Stanley believes the agreement is positive for GlobalFoundries, as it is expected to significantly expand earnings potential without capital expenditure and highlights its strategic value as the only scaled foundry in the US. Project to proceed in two phases, with approximately 900,000 wafers of annual capacity per phase The project will proceed in two phases, with each phase having an annual capacity of approximately 900,000 wafers. The first phase will break ground this quarter, with equipment installation expected to be completed in 2028 and first wafers expected in 2029. A final decision on the second phase will be made by the end of 2028. GlobalFoundries currently has total capacity of approximately 2.8 million wafers, and this opportunity allows it to expand capacity by approximately 1.8 million wafers using external funding. The benefits of the new structure will take time to materialize, but it is expected to reduce utilization risk for growth after 2028. US and Japan to establish SPV for funding; GlobalFoundries to collect management and technology fees Under the agreement structure, the Japanese government will fund the establishment of a special purpose vehicle (SPV) jointly owned by the US and Japan. The SPV will bear all project capital expenditures and fab operations, and receive wafer revenue from customers. GlobalFoundries will provide process technology and manage fab construction and operations. In return, GlobalFoundries will collect construction management fees, operations management fees, and technology fees. Technology fees will begin next year and continue for at least 20 years. To incentivize GlobalFoundries to improve fab operating performance, GlobalFoundries will also share in EBITDA. The new fabs will use the infrastructure and services of GlobalFoundries' existing Malta campus, with related costs reimbursed by the SPV. In addition, under a separate agreement, the US CHIPS Program Office will, starting in 2027, redirect the $955 million in CHIPS funding previously awarded to GlobalFoundries toward R&D and capital expenditures, with a focus on technologies such as silicon germanium, silicon photonics, and interposers. Expected to boost EPS by 10-15 cents next year On the financial impact, GlobalFoundries said the project's return is equivalent to the per-wafer profit the company would earn if it self-funded and owned the project, but without requiring capital investment or bearing the utilization or market risks associated with owning and operating a fab. The company expects the project to contribute $50 million in revenue next year, improve gross margin by 30 to 50 basis points, improve operating margin by 100 to 200 basis points, and boost earnings per share by 10 to 15 cents. Over the long term, as capacity ramps up, these metrics will expand further: gross margin improvement of 100 to 200 basis points, operating margin improvement of 200 to 300 basis points, EPS accretion of $0.50 to $0.75, and cumulative adjusted free cash flow of approximately $3 billion over ten years. Morgan Stanley said these targets are all incremental contributions to the long-term financial model announced at this year's Investor Day. Morgan Stanley rates Hold with $60 price target Morgan Stanley believes this development strongly demonstrates the tailwinds from GlobalFoundries' restructuring initiatives and highlights the strategic value of its US capacity. These tailwinds are expected to help GlobalFoundries shift revenue from consumer markets toward more strategically significant, faster-growing, and less price-sensitive markets such as data centers, industrial, and automotive. GlobalFoundries currently has annual capacity of approximately 2.8 million wafers, and the first phase's additional 900,000 wafers implies an approximately 30% increase in earnings potential with lower risk, which is positive for valuation multiples. This asset-light model means GlobalFoundries can maintain a net cash balance sheet and continue returning cash to shareholders. Morgan Stanley rates GlobalFoundries Hold with a $60 price target, corresponding to approximately 25 times 2027 estimated EPS of $2.44. This valuation represents a premium to mature-node foundry peers in Asia while being in line with US semiconductor customers.