Aggressive EV Traction Expansion Will Suffer Global Competitive Pressures

Key Takeaways

• Expansion into EV traction motors and global market saturation expose Nidec to risks from falling prices, overcapacity, and volatile demand.
  
• Slow digital transformation and reliance on M&A heighten risks to market share, profitability, and operational efficiency as industry trends accelerate.
  
• Expansion into high-growth sectors and geographies, operational efficiency initiatives, and strategic investments are expected to drive sustainable revenue growth, margin improvement, and resilient cash flow.

Catalysts

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

• Nidec's aggressive expansion into EV traction motors exposes the company to a highly competitive and increasingly saturated global market segment, where overcapacity and price erosion-especially from Chinese manufacturers-are likely to exert intense downward pressure on both revenue and net margins in the coming years as the pace of EV adoption becomes more volatile.
  
• The global shift towards onshoring, supply chain de-risking, and localization in major markets such as the US and Europe is leading to rising production costs, operational complexity, and challenging logistics for Japanese manufacturers like Nidec, which is expected to materially compress net margins and slow earnings growth as regional barriers and tariffs proliferate.
  
• Intensifying geopolitical tensions and economic fragmentation-particularly between the US, China, and Europe-are likely to trigger higher tariffs, increased protectionism, and restricted market access, creating substantial risk to Nidec's international sales growth and potentially resulting in underutilized production assets and impaired operating leverage.
  
• Nidec's reliance on ongoing M&A for growth brings significant integration and execution risk, and failures or overpayment in acquisitions could increase the risk of goodwill impairment, depress future returns on invested capital, and further dilute earnings-especially as industry-wide consolidation accelerates and high-quality targets become scarce or overpriced.
  
• As the hardware-centric motor industry moves rapidly toward software-driven, servitized, and energy-efficient solutions, Nidec's historically slower pace of digital transformation and potential lag in advanced software and control technologies may cause persistent loss of market share and require elevated R&D and capital investment, escalating capital intensity and pressuring long-term profitability.

Nidec Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Nidec compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Nidec's revenue will grow by 1.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.4% today to 7.8% in 3 years time.
• The bearish analysts expect earnings to reach ¥214.5 billion (and earnings per share of ¥187.2) by about July 2028, up from ¥167.9 billion 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 17.0x on those 2028 earnings, down from 19.8x today. This future PE is greater than the current PE for the JP Electrical industry at 11.1x.
• Analysts expect the number of shares outstanding to decline by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

Nidec Future Earnings Per Share Growth

Risks

• The rapid global expansion in sectors like AI data centers, battery energy storage systems, and energy infrastructure is driving strong demand for Nidec's motors and cooling technologies, which management expects will lead to substantial increases in both revenue and operating profit over the coming years.
  
• An aggressive program of cost reductions, business consolidation, and efficiency improvements-including significant decreases in variable and fixed costs and a rationalization of production sites-has the potential to structurally improve Nidec's net margins, even if top-line growth temporarily stalls.
  
• Nidec's recurring and maintenance businesses in new domains such as machine tools, AI cooling, and BESS are described as healthy and enjoying strong, steady growth with substantial backlogs, positioning the company for resilient cash flow and earnings growth despite cyclical downturns elsewhere.
  
• The company's deliberate diversification into high-growth markets such as India and North America, and increased local production capacity in response to geopolitical risks and shifting customer demand, reduce the risk of geographic concentration and could drive higher sustained revenue and operating profit in the medium to long term.
  
• Strategic investments in digital transformation, R&D, and continuous M&A have enabled Nidec to capture synergies and broaden its technology base, which is expected to generate additional shareholder value and support compounding earnings growth, bolstered by a significant commitment to shareholder returns through dividends and share buybacks.

Valuation

• The assumed bearish price target for Nidec is ¥2600.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Nidec'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 ¥4800.0, and the most bearish reporting a price target of just ¥2600.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ¥2747.0 billion, earnings will come to ¥214.5 billion, and it would be trading on a PE ratio of 17.0x, assuming you use a discount rate of 7.2%.
• Given the current share price of ¥2898.0, the bearish analyst price target of ¥2600.0 is 11.5% 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.