Expanding Data Center Cooling And EV Demand Will Create Opportunities

Key Takeaways

• Expansion in data center and EV markets, alongside structural reforms and vertical integration, is set to drive sustained revenue growth and margin improvement.
  
• Increased focus on higher-value, automation-driven segments and improved cost discipline are expected to enhance long-term profitability and cash flow stability.
  
• Weakened internal controls, high restructuring risk, volatile end-markets, rising competition, and shifting industry trends all threaten profitability, operational stability, and future growth prospects.

Catalysts

Develops, manufactures, and sells motors, electronics and optical components, and other related products in Japan and internationally.

• Nidec is positioned to capitalize on surging global demand for advanced motor solutions in data centers, particularly with its expanding water cooling module and nearline HDD motor businesses. The company highlighted strong order inquiry trends from major data center markets (U.S., China, Japan) and expects portfolio expansion and market penetration to further accelerate, supporting sustained revenue growth and margin expansion as the AI and cloud infrastructure cycle evolves.
  
• The accelerating transition to electric vehicles is driving Nidec's continued investment in EV traction motors and automotive electronics. Amid ongoing operational reforms, management expects structural improvements and growth from mass production contracts, especially in China and Europe, to translate into significant EBITDA and earnings upside as electrification intensifies worldwide.
  
• Ongoing structural reforms-targeting a ¥100 billion reduction in variable costs and ¥50 billion in fixed costs through business consolidation, site rationalization, and exit from low-margin segments-are expected to materially improve operating margins and net profitability, especially into FY2027, supporting a rerating of the business.
  
• Vertical integration and modernization of production capabilities-including the consolidation of appliance factories in Qingdao and improved supply chain control-are positioning Nidec to capture higher-value opportunities in renewable energy, smart HVAC, and energy efficiency, enhancing long-term revenue growth and margin resilience as regulatory drivers strengthen worldwide.
  
• Early evidence of improved cash flow discipline, coupled with a growing strategic order backlog (especially in power generators and MOEN), suggests potential for durable free cash flow and earnings growth as Nidec transitions away from legacy, unprofitable businesses to new, higher-growth verticals supported by secular automation and electrification trends.

Nidec Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nidec's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.1% today to 8.6% in 3 years time.
• Analysts expect earnings to reach ¥247.4 billion (and earnings per share of ¥217.35) by about August 2028, up from ¥157.4 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥208.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, down from 21.0x today. This future PE is greater than the current PE for the JP Electrical industry at 12.2x.
• Analysts expect the number of shares outstanding to decline by 0.24% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Nidec Future Earnings Per Share Growth

Risks

• Ongoing investigations into country of origin mislabeling and related trade compliance issues, as well as delayed financial filings, may indicate weaknesses in internal controls and regulatory risk, which could lead to fines, increased legal costs, or reputational damage, negatively impacting net margins and long-term earnings.
  
• Structural reform initiatives, including aggressive cost reduction plans (¥100 billion in variable cost and ¥50 billion in fixed costs) require withdrawing from unprofitable businesses and consolidating operations; execution risk remains high, as failed or ineffective restructuring could disrupt operations, erode revenue, and result in one-off restructuring charges impacting profits.
  
• Heavy dependence on cyclical and volatile segments such as data center motors, AI server cooling modules, and automotive (traction motors), combined with fluctuating demand and currency headwinds, increases exposure to unpredictable revenue streams and net sales volatility.
  
• Intensifying global competition in motors, automation, and EV-related sectors, especially from lower-cost Asian manufacturers, risks price compression and market share erosion, which would pressure Nidec's profitability and limit operating margin expansion.
  
• Ongoing long-term trends of power generation transitioning to renewables and the potential commoditization/obsolescence of certain emergency generator and legacy automotive product lines could structurally reduce demand for Nidec's traditional product offerings, limiting top-line growth and long-term revenue potential.

Valuation

• The analysts have a consensus price target of ¥3569.412 for Nidec 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 ¥4800.0, and the most bearish reporting a price target of just ¥2600.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥2893.5 billion, earnings will come to ¥247.4 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 7.4%.
• Given the current share price of ¥2884.5, the analyst price target of ¥3569.41 is 19.2% 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.