Future Prospects Will Brighten With Advancements In 5G, AI, And Electric Vehicles

Key Takeaways

• Investment in new products and expansion, supported by positive cash flow, indicates future revenue growth and earnings potential in various divisions.
  
• Adoption of Soitec's products across mobile, automotive, and AI sectors suggests strong revenue prospects despite current market challenges.
  
• Persistent revenue decline and competitive pressures in multiple segments, coupled with underutilization and inventory challenges, threaten Soitec's growth and operational efficiency.

Catalysts

Designs and manufactures semiconductor materials worldwide.

• Soitec's investment in new product development and capacity expansion indicates future revenue growth potential, supported by strong operating cash flow and positive free cash flow of €35 million, which allows continued R&D investment. This is expected to boost future revenues and earnings.
  
• A rebound in the Mobile Communications division is anticipated as RF-SOI inventories stabilize, with significant adoption of new products in 5G smartphones and Wi-Fi 6, 6E, and 7 applications, likely resulting in increased revenue.
  
• Growing adoption of Soitec's products in the Automotive & Industrial division, driven by increasing content per car and electric vehicle penetration, suggests potential revenue growth despite short-term market weakness.
  
• The Edge & Cloud AI division's significant growth, fueled by demand for low-power computing and Photonics-SOI benefiting from AI-driven data centers, indicates strong future revenue prospects.
  
• Operational efficiencies, by maintaining a high EBITDA margin even with lower revenue, suggest potential improvements in net margins as new high-margin products are adopted and overall revenue rebounds.

Soitec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Soitec's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.2% today to 15.8% in 3 years time.
• Analysts expect earnings to reach €174.9 million (and earnings per share of €4.77) by about February 2028, up from €111.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.1x on those 2028 earnings, up from 18.9x today. This future PE is greater than the current PE for the GB Semiconductor industry at 15.6x.
• 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 9.34%, as per the Simply Wall St company report.

Soitec Future Earnings Per Share Growth

Risks

• The significant 15% year-on-year decline in revenue due to inventory absorption issues in the smartphone value chain indicates potential ongoing instability, which could impact future revenue growth if not resolved.
  
• The weakness in the Automotive & Industrial market, with a 20% decline in H1 '25, poses a risk to revenue recovery in this segment, especially if the market continues to struggle as anticipated through the first half of 2025.
  
• The 2-year delay in qualifications for SmartSiC could give competitors in mono-SiC an advantage in terms of cost in the substrate market, potentially affecting Soitec's revenue growth and product competitiveness in the future.
  
• The underutilization issues in SOI fabs, particularly in France and Singapore, along with anticipated higher depreciation expenses, could continue to impact net margins and operational efficiency.
  
• The new normal of customer inventories stabilizing at around 1 year, higher than pre-COVID levels, may affect future demand dynamics, impacting revenue predictability and growth potential if market conditions change or customer demand fluctuates.

Valuation

• The analysts have a consensus price target of €84.579 for Soitec 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 €160.0, and the most bearish reporting a price target of just €55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.1 billion, earnings will come to €174.9 million, and it would be trading on a PE ratio of 22.1x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of €59.15, the analyst price target of €84.58 is 30.1% 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.