In-House Production And Trade Tensions Will Squeeze Semiconductor Margins

Key Takeaways

• Client insourcing and industry commoditization are shrinking Parade's growth opportunities and eroding pricing power, pointing to weaker long-term revenue and earnings prospects.
  
• Heightened geopolitical tensions and rising R&D and inventory costs risk compressing margins, making profitability and sales increasingly volatile for the company.
  
• Expansion into high-growth data center, AI, and advanced interface markets, combined with strong Tier 1 relationships and improved product mix, positions Parade for sustained profitable growth and resilience.

Catalysts

Operates as a fabless semiconductor company in South Korea, China, Taiwan, Japan, and internationally.

• The increasing trend of major technology clients insourcing semiconductor design and production in-house threatens Parade's addressable end-market size, which could significantly reduce both revenue growth and long-term earnings power as high-profile customers shift away from external suppliers.
  
• Ongoing geopolitical tensions and protectionist trade policies, especially between the United States and China, risk disrupting global supply chains and market access for Parade Technologies, which may lead to lower sales volumes and rising operating costs, ultimately compressing net margins.
  
• Demand for Parade's core interface ICs and display components remains heavily exposed to cyclical downturns in consumer electronics spending and potential saturation in end markets, making revenue streams more volatile and limiting sustainable earnings growth.
  
• Rapid shifts in the semiconductor landscape towards increased commoditization of connectivity and display interface chips will drive down average selling prices, eroding Parade's pricing power and gross margins over the longer term despite recent product mix-driven margin improvements.
  
• The need to keep pace with advancing process nodes and technological standards is pushing Parade into higher ongoing research and development and inventory costs, which, if not matched by successful product monetization, could result in materially weaker profitability and declining net margins in future years.

Parade Technologies Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Parade Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Parade Technologies's revenue will grow by 5.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 16.8% today to 20.2% in 3 years time.
• The bearish analysts expect earnings to reach NT$4.0 billion (and earnings per share of NT$51.69) by about September 2028, up from NT$2.8 billion 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 11.2x on those 2028 earnings, down from 20.9x today. This future PE is lower than the current PE for the TW Semiconductor industry at 30.6x.
• Analysts expect the number of shares outstanding to decline by 1.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.08%, as per the Simply Wall St company report.

Parade Technologies Future Earnings Per Share Growth

Risks

• The ongoing, accelerating adoption of advanced high-speed interface standards such as USB4, USB4.2, and PCIe (including upcoming generations) in notebooks, servers, monitors, and data centers is driving multi-port designs and higher content per device, which supports increasing long-term revenue for Parade Technologies.
  
• Expansion into data center and AI-powered computing through the acquisition of Spectra7 provides Parade with new high-growth verticals; these sectors are experiencing massive capital investment and the need for advanced connectivity solutions, indicating potential for strong new revenue streams and margin expansion over the long term.
  
• The company's success in winning new display and high-speed custom design projects with standard-plus Tier 1 customers, and ongoing engagement for next-generation technologies, suggests strong client relationships and continued growth in both ASP and volume, benefiting Parade's earnings stability and potential upside.
  
• Positive trends in product mix, notably a growing share of higher-margin high-speed interface chips and integrated solutions like tTED, have recently led to gross margin improvements and should continue to support profitability and protect Parade's long-term net margins amidst industry pricing pressures.
  
• Strong geographic diversification and continued customer base expansion in North America and Europe, together with leadership in industry standards, help reduce concentration risk and strengthen earnings resilience, making Parade less vulnerable to individual market or client downturns.

Valuation

• The assumed bearish price target for Parade Technologies is NT$482.81, which represents two standard deviations below the consensus price target of NT$705.29. This valuation is based on what can be assumed as the expectations of Parade Technologies'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 NT$866.0, and the most bearish reporting a price target of just NT$450.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NT$20.0 billion, earnings will come to NT$4.0 billion, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 8.1%.
• Given the current share price of NT$756.0, the bearish analyst price target of NT$482.81 is 56.6% 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.