Laptop And Smartphone AI Sensors Will Shape Future Markets

Key Takeaways

• Expansion in the laptop and smartphone markets, with multiple AI sensors, is driving significant revenue growth and increased market penetration.
  
• The scalable AI platform ensures high efficiency, supporting revenue growth and higher earnings without a substantial rise in operating expenses.
  
• Heavy reliance on a few key OEMs and the smartphone market poses risks to revenue stability and growth amid potential market challenges and competition.

Catalysts

An artificial intelligence (AI) software company, engages in the provision of AI virtual smart sensors for the smartphone, laptop, Internet of Things, and automotive markets in Norway, the United States, China, South Korea, Taiwan, and Japan.

• The expansion of Elliptic Labs' presence in the laptop market is anticipated to drive significant revenue growth. By developing multiple AI sensors per device and capitalizing on the ongoing transformation of the PC market, Elliptic Labs ensures robust future revenue streams through increased product adoption and market penetration.
  
• The company's ability to maintain high EBITDA margins amid revenue growth, shown by their recent 34.5% margin, reflects an operating leverage that can contribute to improved net margins as the business scales and operating costs remain relatively stable.
  
• Elliptic Labs’ scalable AI Virtual Smart Sensor Platform supports significant revenue growth without a proportional increase in operating expenses, likely resulting in higher earnings. The business model's efficiency is expected to contribute positively to EPS as revenues increase.
  
• Accelerating growth in the smartphone and laptop verticals, with Elliptic Labs launching more products and expanding customer relationships, positions the company for increased revenue. The strategic shift to ship multiple sensors per product and launch more models in 2025 highlights a strong foundation for future revenue expansion.
  
• Improved cash flow positivitiy, demonstrated by an increase in cash balance and improved payment terms, enhances Elliptic Labs' capacity for R&D investment, which could lead to future product innovations and thus revenue growth—ensuring a strong cash conversion cycle and improved working capital.

Elliptic Laboratories Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Elliptic Laboratories's revenue will grow by 63.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 47.7% in 3 years time.
• Analysts expect earnings to reach NOK 275.8 million (and earnings per share of NOK 2.44) by about May 2028, up from NOK 9.0 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 9.0x on those 2028 earnings, down from 124.8x today. This future PE is lower than the current PE for the NO Software industry at 39.8x.
• Analysts expect the number of shares outstanding to grow by 0.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.4%, as per the Simply Wall St company report.

Elliptic Laboratories Future Earnings Per Share Growth

Risks

• Delays in launching with additional PC OEMs beyond Lenovo suggest challenges in market expansion and partnership developments, potentially impacting future revenue streams in the PC segment.
  
• Heavy dependence on a limited number of large OEM customers such as Lenovo and specific smartphone brands could pose a risk if these relationships falter or if these customers do not meet their market expansion goals, affecting revenue stability.
  
• The company's business is highly dependent on smartphone shipments, and despite positive growth in 2024, any slowdown in the global smartphone market or lack of performance by key clients could significantly impact revenue growth.
  
• While current financials are strong, reliance on milestone revenue that may cause short-term fluctuations presents a risk to stable cash flow and earnings.
  
• Competition from hardware sensors and the potential for disruptive technologies such as Wi-Fi sensing, despite current assurances, could pressure margins and revenue if these technologies gain effectiveness and market acceptance.

Valuation

• The analysts have a consensus price target of NOK19.0 for Elliptic Laboratories based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK578.6 million, earnings will come to NOK275.8 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of NOK10.62, the analyst price target of NOK19.0 is 44.1% 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.