Advanced Automotive Radar Antennas Will Expand Future Markets

Key Takeaways

• Transition to a full-solution provider and Tier 1 partnerships can boost revenue growth through increased demand and larger production contracts.
  
• Advanced radar antenna collaborations and strategic partnerships in the automotive sector indicate large-scale adoption and accelerated revenue growth potential.
  
• Gapwaves' reliance on automotive sectors and external production, coupled with IP and liquidity risks, could adversely affect revenue and profitability.

Catalysts

Provides waveguide and antenna products.

• Gapwaves' transition to becoming a full-solution provider for antennas in the automotive industry and establishing partnerships with Tier 1 suppliers can significantly enhance revenue growth due to increased product demand and larger scale production contracts.
  
• Initiatives to commence high-volume production and the establishment of a flexible production approach that can be localized to regions (e.g., Europe, China) are likely to improve operational efficiencies and positively impact net margins by lowering production costs and mitigating tariff impacts.
  
• The introduction of advanced automotive radar antennas in collaboration with major companies like Valeo and Desay suggests potential large-scale adoption, likely contributing to substantial revenue growth in forthcoming years because of heightened demand for new-generation radar technologies.
  
• Strategic collaborations, such as Sensrad's partnership with Zenseact (a subsidiary of Volvo), expand Gapwaves' influence in the automotive sector which may accelerate future project acquisition and scale revenue streams through increased order volumes.
  
• Enhanced cash flow prospects, signaled by improving EBITDA and order intake, alongside a robust high-growth market environment driven by regulatory requirements and technological upgrades (such as the shift towards higher frequency antennas), point towards improved earnings potential over the medium to long term as automotive technologies evolve.

Gapwaves Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gapwaves's revenue will grow by 37.1% annually over the next 3 years.
• Analysts are not forecasting that Gapwaves will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Gapwaves's profit margin will increase from -62.6% to the average SE Communications industry of 7.8% in 3 years.
• If Gapwaves's profit margin were to converge on the industry average, you could expect earnings to reach SEK 15.6 million (and earnings per share of SEK 0.5) by about July 2028, up from SEK -48.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 64.1x on those 2028 earnings, up from -9.2x today. This future PE is greater than the current PE for the SE Communications industry at 48.1x.
• 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 5.84%, as per the Simply Wall St company report.

Gapwaves Future Earnings Per Share Growth

Risks

• Gapwaves' reliance on the automotive sector exposes them to potential impacts from tariffs and economic slowdowns, which could delay investment decisions and impact revenue growth.
  
• The production processes for high-volume orders are dependent on external factories, posing risks to cost control and potentially affecting net margins.
  
• Intellectual property concerns exist, particularly with Chinese partners, due to the complex nature of the waveguide technology, which could lead to competition and pressure on revenues if technology is copied.
  
• Significant accounts receivable (SEK 30 million by the end of the quarter) might stress cash flow and liquidity if not managed properly, potentially impacting earnings.
  
• Progress and revenue realization from projects with key customers like HELLA, Sensrad, and Valeo depend heavily on successful ramp-up and production timelines, which, if delayed, could impact short-term revenue and profitability.

Valuation

• The analysts have a consensus price target of SEK27.25 for Gapwaves 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 SEK198.9 million, earnings will come to SEK15.6 million, and it would be trading on a PE ratio of 64.1x, assuming you use a discount rate of 5.8%.
• Given the current share price of SEK14.26, the analyst price target of SEK27.25 is 47.7% 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.