Edge AI And Post-Quantum Cryptography Will Shape Future Opportunities

Key Takeaways

• Rising demand for AI, edge computing, and PQC is expected to boost eMemory's revenue through its security solutions and diversification strategies.
  
• Strategic design wins and industry collaborations in advanced nodes and IP markets are poised to enhance revenue and margins.
  
• Rising operating costs and competitive pressures threaten eMemory's revenue growth and profitability across mature technologies and new market segments.

Catalysts

Researches, develops, manufactures, and sells embedded flash memory products in Taiwan and internationally.

• The increasing adoption of edge AI and edge computing, driven by the need for low power, cost-effectiveness, and enhanced security, is boosting demand for eMemory's OTP and MTP technologies and its security IPs. This trend will likely uplift future revenues.
  
• The anticipated demand for post-quantum cryptography (PQC) with the potential threats posed by quantum computing represents an opportunity for eMemory's PUF-based security solutions, especially for key generation and encryption protection, which should positively impact future revenue growth.
  
• The expansion into leading-edge process nodes, with multiple secured design wins in advanced nodes (3nm, 4nm, 5nm, etc.), positions NeoFuse as a pivotal revenue driver in providing critical support for high-performance applications. This could significantly contribute to revenue expansion.
  
• The collaboration with prominent foundries and inclusion in emerging industry standards such as the Open Compute Project's Caliptra specification ensures sustained licensing and royalties, bolstering future earnings.
  
• Growing partnerships and expanding IPs in leading markets, such as automotive RRAM and high-performance computing applications, point to diversification in the revenue base and potential increases in net margins and long-term revenue growth.

eMemory Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming eMemory Technology's revenue will grow by 31.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 50.9% today to 56.0% in 3 years time.
• Analysts expect earnings to reach NT$4.6 billion (and earnings per share of NT$77.95) by about March 2028, up from NT$1.8 billion 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 83.5x on those 2028 earnings, down from 103.6x today. This future PE is greater than the current PE for the TW Semiconductor industry at 27.9x.
• 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 7.86%, as per the Simply Wall St company report.

eMemory Technology Future Earnings Per Share Growth

Risks

• The decrease in operating profit margin year-over-year is attributed to rising salary and bonus expenses, which could pose a risk to net margins if operating costs continue to increase faster than revenues.
  
• The company's reliance on mature process technologies for a significant portion of its royalties may be negatively impacted by downward pressure on foundry process prices, potentially affecting revenue from royalties.
  
• The competitive landscape of quantum and post-quantum cryptography may pose risks to the adoption and revenue potential of eMemory's PUF-based solutions if competitors develop more advanced or cost-effective alternatives.
  
• The decline in licensing revenue for specific technologies, such as MTP and NeoBit, could suggest challenges in certain market segments, potentially impacting overall revenue growth.
  
• Political and regional factors, such as the expansion of capacities by Europe, the U.S., Japan, and China, may impact eMemory's competitive position and the stability of its revenue streams due to the need for expanded production and localization of operations.

Valuation

• The analysts have a consensus price target of NT$4108.333 for eMemory Technology based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$4610.0, and the most bearish reporting a price target of just NT$3800.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$8.2 billion, earnings will come to NT$4.6 billion, and it would be trading on a PE ratio of 83.5x, assuming you use a discount rate of 7.9%.
• Given the current share price of NT$2545.0, the analyst price target of NT$4108.33 is 38.1% 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.