Geopolitical Tensions And Tech Obsolescence Will Limit Air Traffic Expansion

Key Takeaways

• Dependence on government contracts and geopolitical instability expose the company to significant revenue volatility and growth constraints.
  
• Rapid technological shifts, cybersecurity risks, and stricter environmental regulations threaten competitiveness, reputation, and long-term demand for its solutions.
  
• Strong order growth, technological innovation, and global diversification drive stability and visibility in future earnings while expanding opportunities in defense, air traffic, and public safety markets.

Catalysts

Develops and markets communication and information systems for safety-critical control centers in Europe, North America, Asia, Australia, South America, Middle East, Africa, and worldwide.

• The rapid global adoption of AI and automation in air traffic management may outpace Frequentis' ability to evolve its technology, risking technological obsolescence and a subsequent loss in market share, which would undermine long-term revenue growth.
  
• Intensifying geopolitical instability and restrictions on international collaboration could jeopardize Frequentis' access to export markets, limiting participation in cross-border infrastructure projects and constraining future revenue expansion outside Europe and North America.
  
• The company's ongoing heavy dependence on large government and public-sector contracts exposes it to cyclical and politically motivated procurement fluctuations, increasing the likelihood of periods of revenue volatility and reduced net margin predictability over the long term.
  
• Growing cybersecurity threats to mission-critical communication infrastructure demand relentless and costly updates; any failure to keep pace or respond to high-profile incidents would seriously damage Frequentis' reputation, erode its renewal rates, and impact future earnings.
  
• Environmental regulations and new sustainability constraints could slow the pace of global air traffic expansion, leading to decreased investments in modernization and digitalization of control systems, directly reducing demand for Frequentis' solutions and hampering its long-term order intake and revenue trajectory.

Frequentis Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Frequentis compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Frequentis's revenue will grow by 8.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.6% today to 5.6% in 3 years time.
• The bearish analysts expect earnings to reach €34.2 million (and earnings per share of €2.58) by about August 2028, up from €22.0 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 19.1x on those 2028 earnings, down from 37.4x today. This future PE is lower than the current PE for the DE Aerospace & Defense industry at 98.9x.
• 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 6.02%, as per the Simply Wall St company report.

Frequentis Future Earnings Per Share Growth

Risks

• Strong double-digit growth in order intake, revenues, and orders on hand-especially a 35.6% increase in order intake and a record €764 million in backlog-suggests robust and accelerating demand, increasing the likelihood of rising revenue levels in coming years.
  
• High proportion of long-term, multi-year projects with improving profitability as they progress, combined with a well-filled sales pipeline and committed orders covering 50–55% of next year's planned revenue, indicate visibility and stability in future earnings.
  
• Sustained investments in R&D and the development of disruptive technology such as Release 10 (virtualized voice communication) position Frequentis at the forefront of digital air traffic transformation, supporting potential improvements in operating margins as these solutions scale.
  
• Rapid geographic diversification, particularly significant growth in North and South America and ongoing success in Australian defense contracts, reduces dependence on mature European markets and offers resilience for both revenue and net profit.
  
• Growing exposure to secular trends-including modernization of global air traffic management, rising public safety spending, and the increased integration of drones and military applications-suggest continued expansion of addressable markets, underpinning revenue growth and long-term order flow.

Valuation

• The assumed bearish price target for Frequentis is €42.21, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Frequentis'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 €70.0, and the most bearish reporting a price target of just €42.21.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €616.2 million, earnings will come to €34.2 million, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of €62.0, the bearish analyst price target of €42.21 is 46.9% 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.