Radar Content Expansion May Struggle With Pricing Pressure Yet Ultimately Support Long-Term Upside

Catalysts

About Gapwaves

Gapwaves develops and licenses advanced waveguide antenna technology for high performance radar applications, primarily in the automotive sector.

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

• Although the shift toward legally mandated active safety and higher automation levels in vehicles underpins long term demand for radar sensors, any slowdown or redesign cycles at major Tier 1 partners such as Valeo and HELLA could delay platform launches and push out volume ramps. This could postpone the inflection point in product revenue and earnings.
• Despite radar content per vehicle likely increasing as corner radar and imaging radar proliferate across volume car platforms, OEM efforts to standardize hardware and aggressively reduce bill of materials could pressure antenna pricing. This could limit the operating leverage required to lift gross margins and EBITDA margins.
• Although the asset light, partner based production model enables localized supply in China, Europe and potentially North America, quality issues, capacity bottlenecks or misaligned incentives at contract manufacturers like Frencken could generate recurring start up costs. These could weigh on net margins and free cash flow during future ramps.
• While the expanding use of autonomous radar in off road, defense and industrial applications offers diversification beyond passenger cars, long and uncertain procurement cycles in these niches could result in lumpy project income. This may complicate scaling toward more predictable, high margin product revenue.
• Although an extensive patent portfolio and next generation antenna development support long term competitiveness in higher frequency, higher resolution radar, rivals with deeper balance sheets could out invest Gapwaves in R&D and pricing. This could constrain future revenue growth and limit the path to sustainably higher earnings.

Assumptions

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

• The bearish analysts are assuming Gapwaves's revenue will grow by 37.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -55.1% today to 1.2% in 3 years time.
• The bearish analysts expect earnings to reach SEK 2.7 million (and earnings per share of SEK 0.0) by about December 2028, up from SEK -48.1 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK11.6 million.
• 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 279.9x on those 2028 earnings, up from -12.4x today. This future PE is greater than the current PE for the SE Communications industry at 50.9x.
• The bearish 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 6.04%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The ongoing rights issue highlights that Gapwaves still relies on external equity funding to finance its scale up. If the raise is only partially subscribed or future access to capital becomes more expensive, the company may need to slow investment in capacity and technology, which could constrain revenue growth and delay a path to sustainable earnings.
• Automotive demand is described as challenging for several OEMs and Tier 1 suppliers. A prolonged downturn, platform cancellations or reduced ADAS content on mass market vehicles could offset the positive regulatory trend for more radar sensors and lead to lower than expected product volumes and pressured net margins.
• The asset light, partner based model depends heavily on third party manufacturers such as Frencken and future regional partners. Any quality problems, ramp up delays, cost overruns or geopolitical trade barriers in China, Europe or North America could erode the expected scalability benefits and weigh on gross margins and EBITDA.
• Current growth is heavily driven by a few key programs with Valeo and HELLA. Any loss of single source status, slower than planned ramp on these platforms or a failure to win follow on contracts on future vehicle architectures would make revenues more volatile and could limit earnings visibility despite strong long term ADAS adoption trends.

Valuation

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

• The assumed bearish price target for Gapwaves is SEK20.0, which represents up to two standard deviations below 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 more bearish 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 bearish analyst cohort, you'd need to believe that by 2028, revenues will be SEK228.1 million, earnings will come to SEK2.7 million, and it would be trading on a PE ratio of 279.9x, assuming you use a discount rate of 6.0%.
  
• Given the current share price of SEK16.38, the analyst price target of SEK20.0 is 18.1% 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.