Elevated Costs And Intense Rivalry Will Drain Value

Key Takeaways

• Intensifying open-source adoption and industry shift to open standards threaten Audinate's technology edge, margin sustainability, and long-term market relevance.
  
• Persistent cost increases and slow enterprise spending risk an inflated cost base and declining earnings if new investments fail to yield strong adoption.
  
• Audinate's shift to high-margin software and SaaS, backed by a strong market position and new product focus, is set to enhance growth, stability, and profitability.

Catalysts

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

• Commodity-style standardization of AV-over-IP protocols and a rapidly growing open-source movement in professional AV could commoditize Dante's core technology, drastically reducing differentiation, empowering rivals and pressuring both pricing and long-term revenue streams.
  
• The secular risk of declining enterprise and entertainment capital expenditure, driven by automation, remote work normalization, and softening demand due to global trade barriers and higher tariffs, threatens to shrink Audinate's addressable market and could result in persistent growth rates well below historical averages.
  
• Accelerating competition from large networking and silicon companies leveraging open standards, combined with persistent industry adoption of alternatives such as AVB/TSN and NDI, puts sustained downward pressure on market share, hindering revenue growth and diminishing Audinate's operating leverage.
  
• The company's heavy investment in Iris and Dante Director, with a 25% increase in operating costs projected for FY26 and significant losses already seen, creates the risk of a permanently elevated cost base without corresponding recurring revenue if adoption underwhelms or market shifts accelerate towards more flexible, lower-cost interoperable solutions.
  
• Long-term structural trends toward cloud-based and software-driven AV, if dominated by open platforms or generic solutions, could leave Audinate's proprietary hardware and software ecosystem increasingly obsolete, causing net margin compression and eroding future earnings power.

Audinate Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Audinate Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Audinate Group's revenue will grow by 9.6% annually over the next 3 years.
• The bearish analysts are not forecasting that Audinate Group will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Audinate Group's profit margin will increase from -10.3% to the average AU Electronic industry of 9.1% in 3 years.
• If Audinate Group's profit margin were to converge on the industry average, you could expect earnings to reach A$7.4 million (and earnings per share of A$0.09) by about August 2028, up from A$-6.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 60.7x on those 2028 earnings, up from -67.4x today. This future PE is greater than the current PE for the AU Electronic industry at 20.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

Audinate Group Future Earnings Per Share Growth

Risks

• Audinate is experiencing strong momentum in the transition from hardware-based to high-margin software and SaaS solutions, as reflected by consistent embedded software growth and expanding gross margins above 80 percent, which could drive long-term revenue and profit growth.
  
• The company's installed base and network effect, with more than 8 million Dante-enabled devices and over 4,600 third-party compatible products, provides a significant barrier to entry for competitors, supporting recurring revenue streams and long-term earnings.
  
• New product launches like Dante Director, the expansion into control and unified AV management, and the strategic acquisition of Iris position Audinate to address broader market needs and capture additional market share, which may support revenue and profit growth over time.
  
• Ongoing investments in product development and go-to-market capabilities are funded by a robust cash position, allowing Audinate to scale operations and accelerate growth in software and cloud-based offerings, which can improve margin leverage and earnings as revenues grow.
  
• The expanding recurring revenue base from SaaS products such as Dante Director and the future contributions from Iris could provide improved revenue stability and higher net margins, contradicting a sustained decrease in share price if adoption scales as projected.

Valuation

• The assumed bearish price target for Audinate Group is A$4.3, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Audinate Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$15.0, and the most bearish reporting a price target of just A$4.3.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$81.6 million, earnings will come to A$7.4 million, and it would be trading on a PE ratio of 60.7x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of A$5.1, the bearish analyst price target of A$4.3 is 18.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.