Industrial AI Adoption And Manufacturing Capacity Will Support Steady Long-Term Performance

Catalysts

About Seco

Seco provides integrated edge computing and AI solutions that combine modular hardware with Clea software to digitalize OEM products and industrial operations.

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

• Although industrial AI adoption is expected to accelerate and Seco now offers a full end to end edge AI stack, OEM integration cycles remain slow and complex, which could limit the pace at which higher margin software and algorithm revenues scale into earnings.
• Despite strong initial traction in vertical solutions like Clea Vend and industrial HMI, customer dependence on legacy systems and fragmented tech stacks may constrain the conversion of pilot projects into broad rollouts, tempering the uplift to recurring revenue growth.
• While the new Arezzo and China plants expand internal capacity to around EUR 350 million in potential revenue and support manufacturing efficiency, underutilization risk in a slower demand scenario would dilute operating leverage and weigh on EBITDA margins.
• Although partnerships and design wins in energy and medical equipment position Seco to benefit from growing digital infrastructure and automation needs, elongated qualification and certification timelines in these regulated sectors could delay revenue recognition and backlog monetization.
• While the Raspberry Pi based Modular Vision line targets a large installed base of cost sensitive industrial customers and should broaden addressable markets, pricing pressure in entry level edge hardware could offset unit growth and limit gross margin expansion.

Assumptions

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

• The bearish analysts are assuming Seco's revenue will grow by 11.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -4.7% today to 15.1% in 3 years time.
• The bearish analysts expect earnings to reach €39.9 million (and earnings per share of €0.21) by about December 2028, up from €-9.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €56.1 million.
• 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 24.5x on those 2028 earnings, up from -43.0x today. This future PE is greater than the current PE for the IT Tech industry at 20.7x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.26%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is experiencing accelerating top line momentum with sales up 9% year-on-year in the latest quarter and all key geographies except Germany growing above 20%. If this is sustained alongside a 10% increase in backlog and a book to bill ratio consistently above 1, it could drive revenue growth that pushes the share price higher than expected.
• Structural margin improvement is evidenced by gross margin reaching 55% and EBITDA margin rising to around 22%, with a 50% year-on-year increase in EBITDA. Supported by operating leverage, lower manufacturing costs and better component purchasing, this could result in stronger net margins and earnings expansion than currently reflected in a flat share price view.
• Long term secular adoption of industrial AI and the scaling of Clea and the Application Hub, including over 150 algorithms and growing connected devices, together with hardware agnostic deployments, may significantly boost high margin recurring software revenue and overall earnings. This would challenge the assumption that the equity will remain range bound.
• Expansion of internal production capacity by around 50% to support approximately EUR 350 million of potential revenue, combined with design wins of about EUR 24 million for 2026 and strong vertical traction in Industrial, Medical and Energy, could underpin multi year organic growth. This may materially re rate the valuation via higher revenue and earnings.

Valuation

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

• The assumed bearish price target for Seco is €3.0, which represents up to two standard deviations below the consensus price target of €3.71. This valuation is based on what can be assumed as the expectations of Seco'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 €4.6, and the most bearish reporting a price target of just €3.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €264.9 million, earnings will come to €39.9 million, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of €2.94, the analyst price target of €3.0 is 1.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.