Persisting Tech Headwinds And Rising Regulation Will Erode Margins

Key Takeaways

• Elevated costs from inflation, regulation, and R&D investments are eroding margins and reducing the stability of earnings and free cash flow.
  
• Increasing competition, reliance on volatile segments, and ongoing compliance pressures jeopardize sustainable revenue growth and future profitability.
  
• Strong cash flow, robust order backlog, and targeted expansion in high-growth segments position NOTE for resilient profitability, reduced earnings volatility, and sustained long-term growth.

Catalysts

Provides electronics manufacturing services in Sweden, Finland, the United Kingdom, Bulgaria, Estonia, China, and internationally.

• Persistent headwinds from elevated interest rates and ongoing inflation in the tech sector are likely to drive up NOTE's cost of capital and materially increase operating expenses, eroding net margins over the long term despite current cost controls.
  
• Heightened regulatory scrutiny and global data privacy requirements threaten to drive compliance costs sharply higher and may limit monetization opportunities, resulting in sustained pressure on profitability and dampening potential future earnings growth.
  
• Intensifying competition and commoditization within digital infrastructure and note-taking solutions is accelerating, heightening the risk of margin compression and loss of market share, making sustained revenue growth increasingly unlikely for NOTE.
  
• Continuous large-scale investments in R&D, automation, and acquisitions to remain competitive could result in long-run suppression of free cash flow, ongoing shareholder dilution, and ultimately reduced earnings per share if these outlays fail to generate meaningful incremental growth.
  
• Significant reliance on growth from segments such as Security & Defense-which are prone to lumpy, unpredictable order flow-along with ongoing customer concentration, creates material volatility in revenues and limited pricing power, undermining the stability and predictability of NOTE's earnings base over time.

NOTE Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on NOTE compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NOTE's revenue will grow by 6.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 6.7% today to 7.9% in 3 years time.
• The bearish analysts expect earnings to reach SEK 364.9 million (and earnings per share of SEK 12.83) by about September 2028, up from SEK 257.0 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 bearish analyst cohort, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 20.7x today. This future PE is lower than the current PE for the GB Electronic industry at 26.4x.
• 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 6.38%, as per the Simply Wall St company report.

NOTE Future Earnings Per Share Growth

Risks

• NOTE's consistently strong cash flow generation, robust cash position, and low net debt provide ample financial flexibility and room for future investments or acquisitions, which could enhance both revenue and earnings resilience over the long term.
  
• The order backlog has recently returned to a growth trajectory, increasing 6% from the previous quarter and signaling improving forward demand, which is supported by customers' forecasts pointing toward significant growth one to two years ahead, implying potential for revenue acceleration.
  
• Ongoing expansion in high-growth customer segments such as Greentech and Security & Defense (with respective year-to-date growth of 15% and 18%, and expectations for further strong performance), mitigates weakness elsewhere and may support above-average company-wide revenue growth and margin stability.
  
• Management's confidence in maintaining high profitability, with sustained underlying margins in the 9.5% to 10.5% range even through periods of flat or declining sales, indicates a resilient business model likely to protect net margins and earnings even during economic slowdowns.
  
• The company's active pipeline for acquisitions-coupled with discipline in valuation and successful past integration-enables ongoing diversification of revenue streams, potentially accelerating top-line growth and reducing earnings volatility over the long term.

Valuation

• The assumed bearish price target for NOTE is SEK127.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of NOTE'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 SEK210.0, and the most bearish reporting a price target of just SEK127.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK4.6 billion, earnings will come to SEK364.9 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 6.4%.
• Given the current share price of SEK186.5, the bearish analyst price target of SEK127.0 is 46.9% 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.