Bullish View Sees Radar Antenna Patents And Outsourced Production Driving Future Upside

Catalysts

About Gapwaves

Gapwaves develops and licenses high performance antenna technology for automotive radar and other radar based applications.

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

• Entry into automotive grade high volume production in early 2024, with more than 500,000 antennas produced so far, positions Gapwaves to shift its revenue mix toward recurring product sales as contracted volumes for customers like Valeo and HELLA ramp.
• Regulatory and customer driven adoption of active safety systems in Europe, North America and other regions is pushing radar sensor content per vehicle higher. This can support sustained growth in antenna unit demand and longer term revenue visibility once platforms reach start of production.
• Corner radar and imaging radar programs with leading Tier 1 suppliers such as Valeo and HELLA give Gapwaves exposure to both high volume lower priced antennas and lower volume higher priced antennas. This can broaden the revenue base and support blended gross margin development over time.
• Asset light production with certified partners like Frencken and region specific supply chains in China, Europe and potentially North America reduces capital needs while allowing Gapwaves to localize output for OEM requirements. This can support cash flow and margin resilience as volumes scale.
• A large and geographically broad patent portfolio of more than 45 patent families, combined with ongoing development of new antenna generations, can support pricing power in higher value segments such as imaging radar and selected non automotive use cases. This may benefit long term earnings quality.

Assumptions

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

• The bullish analysts are assuming Gapwaves's revenue will grow by 43.9% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -55.1% today to 12.7% in 3 years time.
• The bullish analysts expect earnings to reach SEK 33.0 million (and earnings per share of SEK 0.9) by about January 2029, up from SEK -48.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 30.4x on those 2029 earnings, up from -11.5x today. This future PE is lower than the current PE for the SE Communications industry at 46.8x.
• The bullish 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 6.08%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The current ramp up phase is already creating start up costs, the need for extra suppliers and extraordinary material sourcing to meet Valeo demand. If these operational pressures persist longer than expected, it could cap gross margins and delay the move from EBITDA losses to sustained earnings.
• Roughly half of the recent quarter's SEK 20.4 million in sales came from production equipment, which carries lower margins than design services. If product sales do not become a larger share of revenue as expected, overall profitability and future earnings could remain weaker than the bullish margin assumptions imply.
• Gapwaves relies on long term contracts with a small set of Tier 1 partners, often as a single source antenna supplier on major platforms. Any delay, renegotiation, lower volume outcome versus expectations or loss of a program with Valeo, HELLA or similar customers could affect antenna volumes and the revenue ramp that underpins future earnings.
• The business model depends on outsourced, regionalized production in China, Europe and eventually North America at a time of fluid tariffs and geopolitics. If trade barriers or localization rules limit where partners like Frencken can serve carmakers, unit growth, pricing and cash flow could be pressured.

Valuation

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

• The assumed bullish price target for Gapwaves is SEK27.0, which represents up to two standard deviations above the consensus price target of SEK23.5. This valuation is based on what can be assumed as the expectations of Gapwaves's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK27.0, and the most bearish reporting a price target of just SEK20.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be SEK260.2 million, earnings will come to SEK33.0 million, and it would be trading on a PE ratio of 30.4x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of SEK15.18, the analyst price target of SEK27.0 is 43.8% 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.