Cyclical Semiconductor Exposure And Geopolitical Tensions Will Hinder Growth

Key Takeaways

• Heavy dependence on the cyclical semiconductor sector and changing technology trends threatens revenue stability, backlog visibility, and long-term earnings prospects.
  
• Increased geopolitical risks, customer concentration, and mounting competitive pressures jeopardize growth, margin strength, and operational resilience.
  
• VAT Group's innovation, market expansion, and operational agility are driving long-term growth, earnings stability, and resilience despite short-term industry and currency headwinds.

Catalysts

Develops, manufactures, and sells vacuum and gas inlet valves, multi-valve modules, motion components, and edge-welded metal bellows.

• VAT Group faces significant overexposure to the highly cyclical semiconductor industry, with 80 percent of its business directly tied to this market; a prolonged downturn, increased onshoring, or major investment delays in wafer fab equipment and chip production would materially depress both revenue and earnings over the long term.
  
• The rapid acceleration of geopolitical fragmentation and export controls-particularly between the U.S., China, and Europe-could lead to restricted technology transfers, direct supply chain disruptions, and even forced loss of access to major customers or end markets, threatening VAT Group's future revenue growth and increasing operational risk.
  
• Customer concentration remains a critical vulnerability; as Chinese OEMs gain domestic market share and Western semiconductor equipment companies slow orders or see investment delays, VAT Group could experience severe top-line revenue pressure and compressed net margins if a key customer pivots or is lost due to changing industry power structures.
  
• As new technology platforms (such as Gate-All-Around and high-bandwidth memory) become investment priorities, legacy node investment and related vacuum valve orders are plateauing. Even if leading-edge wins accrue, the aggregate order intake is likely to stagnate or underperform market expectations, sustaining lower backlog visibility and downward earnings revisions.
  
• Intensifying international competition-especially as Asian rivals scale R&D and production-could erode VAT Group's pricing power and force margin sacrifices. Combined with rising labor costs, increased R&D spend required for regulatory and technological catch-up, and the inability to pass through adverse foreign exchange effects to customers, net margins and profit growth are likely to remain under pressure for the foreseeable future.

VAT Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on VAT Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming VAT Group's revenue will grow by 11.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 22.5% today to 26.0% in 3 years time.
• The bearish analysts expect earnings to reach CHF 338.7 million (and earnings per share of CHF 11.24) by about July 2028, up from CHF 211.8 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 28.9x on those 2028 earnings, down from 42.2x today. This future PE is greater than the current PE for the GB Machinery industry at 18.9x.
• Analysts expect the number of shares outstanding to grow by 0.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.99%, as per the Simply Wall St company report.

VAT Group Future Earnings Per Share Growth

Risks

• The ongoing global expansion of wafer fabrication capacity, including the construction of more than 100 new fabs and continued investments from both leading foundries and Chinese OEMs, is expected to underpin strong multi-year demand for VAT Group's products, creating a structural tailwind for long-term revenue growth.
  
• VAT Group's technological leadership and persistent innovation, evidenced by a 27% increase in specification wins and a consistent R&D investment of around 7% of group sales, are strengthening its competitive position and pricing power, likely supporting net margins and enabling outperformance relative to industry cycles.
  
• Diversification efforts-such as expansion in adjacent markets and a growing services/aftermarket business, which now accounts for a significant portion of specification wins and is poised to reach up to 15% of group sales by 2027-are increasing the stability and predictability of recurring earnings streams.
  
• The surging demand for advanced technologies driven by AI, high-bandwidth memory, and leading-edge semiconductor transitions like 2nm and Gate-All-Around is accelerating the content of vacuum solutions per wafer fab, positioning VAT to outgrow the overall wafer fab equipment market and boost revenue and EBITDA over the next cycle.
  
• Despite short-term foreign exchange and cyclical headwinds, VAT Group's operational flexibility, conservative capital structure, and ability to rapidly align costs and capacity-combined with robust free cash flow generation and a strong balance sheet-support resilience in earnings and an ability to self-fund growth and R&D through various market conditions, limiting downside risk to net income and margins.

Valuation

• The assumed bearish price target for VAT Group is CHF282.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of VAT 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 CHF410.0, and the most bearish reporting a price target of just CHF282.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CHF1.3 billion, earnings will come to CHF338.7 million, and it would be trading on a PE ratio of 28.9x, assuming you use a discount rate of 5.0%.
  
• Given the current share price of CHF298.2, the bearish analyst price target of CHF282.0 is 5.7% 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.