Electrification And Sensor Demand Are Expected To Drive Long-Term Upside

Catalysts

About Melexis

Melexis develops mixed signal semiconductor solutions and sensing technologies for automotive and industrial applications worldwide.

What are the underlying business or industry changes driving this perspective?

• Rising electrification in vehicles, including the shift to 48 volt architectures and advanced EV thermal management, supports sustained demand for motor drivers and current sensors. This may lift top line growth and support operating leverage as volumes scale.
• Growing adoption of premium comfort, safety and automation features in cars increases sensor and driver content per vehicle, particularly in China where platform innovation is fastest. This can structurally expand revenue and improve net margins through higher value content.
• Expansion beyond automotive into areas such as server cooling for AI infrastructure, robotics and tactile sensing modules broadens Melexis’ addressable market, diversifies its customer base and creates new high margin revenue streams over the medium term.
• Improving manufacturing yields on new processes and the gradual normalization of cost of yield are expected to add around 2 percentage points to gross margin over the coming quarters. This would directly enhance operating margin and earnings power even on modest sales growth.
• Disciplined CapEx and operating cost control, combined with continued investment in innovation and a record cadence of product launches, may support cash generation and earnings resilience while positioning the company to capture outsized revenue growth once end markets fully recover.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Melexis's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 13.2% today to 18.1% in 3 years time.
• Analysts expect earnings to reach €198.2 million (and earnings per share of €5.17) by about December 2028, up from €108.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €244.5 million in earnings, and the most bearish expecting €171.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.0x on those 2028 earnings, down from 21.4x today. This future PE is lower than the current PE for the GB Semiconductor industry at 21.4x.
• Analysts expect the number of shares outstanding to grow by 0.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.56%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• End market recovery remains slow and visibility into 2026 is unusually low. If short-term ordering persists and OEMs continue to delay new platforms, Melexis could see weaker than expected volume growth, limiting revenue and earnings expansion.
• Record high inventories across the supply chain, combined with only gradual yield improvements and shorter cycle times, create a risk that slower sell-through forces production cuts or discounting, which would pressure gross margins and net margins.
• Intensifying competition and price pressure in China, particularly from capable local players in EV and sensing, could force larger than planned annual price reductions, eroding Melexis’ pricing power, revenue per unit and operating margin.
• Strategic growth areas such as 48 volt architectures, AI related server cooling and robotics may take longer than expected to convert strong design win funnels into meaningful volumes. This could delay the mix shift toward higher value applications and constrain long-term revenue and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of €71.92 for Melexis 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 €92.0, and the most bearish reporting a price target of just €52.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €1.1 billion, earnings will come to €198.2 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of €57.45, the analyst price target of €71.92 is 20.1% 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.