Future Performance Will Be Driven By Dante Software And Video Products

Key Takeaways

• Shift from hardware to software boosts margins and earnings, with embedded software driving high profitability.
  
• Expansion in video business and cloud software, including Dante Director, is set to drive significant future revenue growth.
  
• Audinate faces revenue challenges due to inventory buildup, demand softness, and potential tariff impacts, alongside changes in product mix and increased development costs.

Catalysts

Engages in develops and sells digital audio visual (AV) networking solutions Australia and internationally.

• The growth in demand for embedded software products and the shift from hardware to software-based solutions are expected to improve gross margins due to lower inventory impacts and higher profitability in software. This will positively impact future earnings and gross margins.
  
• The strategic investment in Dante Director, a SaaS cloud software offering, is anticipated to drive future revenue growth as it expands the company's software offerings and leverages the ongoing digital transformation in audiovisual installations.
  
• The development and launch of next-gen AVIO adaptors and new software products like the professional Dante Virtual Soundcard are expected to contribute to revenue in the second half of FY '25, enhancing overall revenue growth.
  
• The strong pipeline of design wins and new product launches with increased OEM partners indicates future repeat revenue generation, likely sustaining revenue growth in the upcoming years.
  
• Audinate's strategic focus on expanding the video business and the launch of multiple video channels in their products indicates high growth potential, expected to drive future revenue as the video segment outpaces audio growth rates.

Audinate Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Audinate Group's revenue will grow by 14.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.5% today to 8.6% in 3 years time.
• Analysts expect earnings to reach A$9.5 million (and earnings per share of A$0.12) by about July 2028, up from A$3.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 118.4x on those 2028 earnings, down from 156.9x today. This future PE is greater than the current PE for the AU Electronic industry at 30.6x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.62%, as per the Simply Wall St company report.

Audinate Group Future Earnings Per Share Growth

Risks

• Audinate is facing revenue headwinds due to the accumulation of inventory by their manufacturing customers, which could impact financial performance through decreased orders and revenue until FY '26.
  
• Given the shift towards software-based solutions, there is a potential moderation in revenue even as gross margin dollars increase, reflecting a significant change in product mix that may affect top-line growth.
  
• The company's growth prospects may be hindered by the ongoing softness in demand for chips and modules, which is expected to continue affecting sales until a return to normal order patterns in FY '26.
  
• Despite a strong balance sheet, continued investment in product development, particularly in new software and adaptors, could pressure net margins in the short term due to increased costs without a guaranteed immediate return.
  
• Global economic conditions and potential tariffs pose a risk to cost structures and profit margins, particularly concerning tariff increases that could affect components or products like the Ultimo chip.

Valuation

• The analysts have a consensus price target of A$10.79 for Audinate Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$19.0, and the most bearish reporting a price target of just A$6.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$111.0 million, earnings will come to A$9.5 million, and it would be trading on a PE ratio of 118.4x, assuming you use a discount rate of 7.6%.
• Given the current share price of A$6.18, the analyst price target of A$10.79 is 42.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.