AI Chip Equipment And Data Center Demand Will Transform This Vision Supplier’s Long-Term Prospects

Catalysts

About Basler

Basler supplies computer vision hardware and software used in factory automation and other industrial applications.

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

• Exposure to equipment for AI chip production and data center hardware, where current investment projects are accelerating, positions Basler to capture higher value orders that can support revenue growth and help sustain gross margins near the recent 47.8% to 49% range.
• Rising activity in consumer electronics and battery production projects, which management expects to see around late Q4 and early Q1, offers a pipeline of large orders that can add to the existing bookings tailwind and support earnings before tax margins against a relatively fixed cost base.
• Direct sales presence in key regions such as China, Korea, France, Italy and now India through acquired distributors allows Basler to sell more of the full vision portfolio to existing OEMs, which can increase share of wallet per customer and underpin both top line growth and improved free cash flow.
• Broadening from stand alone cameras to full computer vision systems, including pylon software and AI enablement, encourages customers to source more components from one supplier, which can support higher average selling prices, a richer product mix and potentially stronger net margins over time.
• Ongoing use of AI tools internally in areas like software development and administration, combined with a stable headcount of around 814 FTEs, creates room for productivity gains so that additional revenue, including from AI related semicon and logistics demand, can flow through more efficiently to earnings and free cash flow.

Assumptions

This narrative explores a more optimistic perspective on Basler compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Basler's revenue will grow by 11.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 1.9% today to 12.4% in 3 years time.
• The bullish analysts expect earnings to reach €36.7 million (and earnings per share of €1.24) by about January 2029, up from €4.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €26.1 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 22.3x on those 2029 earnings, down from 115.7x today. This future PE is lower than the current PE for the GB Electronic industry at 42.2x.
• The bullish 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 6.55%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Management is planning to keep headcount roughly flat at around 814 FTEs while relying on productivity gains and AI tools. If revenue growth stalls or broader factory automation demand does not pick up beyond current high tech niches, the fixed cost base could cap operating leverage and put pressure on earnings before tax margins and free cash flow.
• The company is leaning heavily on AI related semiconductor and data center equipment projects plus batteries, logistics and consumer electronics to support bookings. Management describes overall demand as mediocre with Purchasing Managers' Index levels around 50 and muted orders from most verticals, so a prolonged absence of a broad based recovery could restrain revenue and limit any improvement in net margins.
• Basler faces intense competition from Asian peers, particularly in China, and management expects competition to stay high or even increase. Some currencies such as the Chinese renminbi, Japanese yen and Korean won have weakened about 16% against the euro, which could pressure pricing, reduce gross margin from the current 47.8% to 49% range and weigh on earnings.
• The company is increasingly exposed to China and India, and management explicitly highlights that continued access to the China market is a key assumption for its midterm plan. Any trade restrictions, tariffs or geopolitical tensions that limit this access could hit bookings, disrupt the direct sales model and reduce revenue and cash generation.
• Basler is broadening from cameras into full computer vision systems with pylon software and AI capabilities, but management also aims to trim the R&D quota from 12.4% while keeping staff numbers stable. Underinvestment or missteps in new technologies could weaken the product offering over time, make it harder to win large OEM projects and eventually show up in slower revenue growth and softer gross margins.

Valuation

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

• The assumed bullish price target for Basler is €22.0, which represents up to two standard deviations above the consensus price target of €18.98. This valuation is based on what can be assumed as the expectations of Basler's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €22.0, and the most bearish reporting a price target of just €12.4.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be €296.4 million, earnings will come to €36.7 million, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of €15.04, the analyst price target of €22.0 is 31.6% 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.