Transitioning To DDR5 And Edge AI Products Will Strengthen Future Market Position

Key Takeaways

• Strategic DDR5 transition and DDR3/DDR4 capacity shift are set to boost revenue growth and gross margins through higher bit shipments and premium pricing.
  
• Focus on edge AI computing and cost reduction efforts could enhance market positioning and operating margins as favorable DRAM conditions emerge.
  
• Ongoing struggles with profitability, weak sector demand, and uncertainties in DDR5 production plans indicate potential challenges for future revenue and operating margins.

Catalysts

Research, develops, manufactures, and sells semiconductor products in Taiwan, Japan, Malaysia, China, the United States, Thailand, Germany, Singapore, Poland and internationally.

• Nanya Technology plans to increase its bit shipment by more than 20% year-over-year in 2025, driven by converting DDR3 and DDR4 capacity to DDR5 and 1B technology, which is expected to improve shipment volumes. This should positively impact revenue growth as higher bit shipments typically translate to increased sales.
  
• The increasing demand for DDR5, which typically has a higher price premium compared to DDR4, suggests potential gross margin improvement as the company transitions to producing and selling a more valuable product over time.
  
• The company is focusing on strategic partnerships to explore market opportunities in edge AI computing, with plans to release products by the end of 2026. Successfully capitalizing on this innovation could lead to significant future revenue growth and improved market positioning.
  
• Expected improvement in general DRAM market conditions starting from the second half of 2025 could result in better revenue and net margins for Nanya Technology, as inventory adjustments and economic recovery support a return to growth in non-AI markets.
  
• Cost reduction efforts are expected to yield meaningful results by Q4 2025, particularly through a reduction in depreciation costs. This should help improve operating margins and eventually net income as the company navigates through financial challenges.

Nanya Technology Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nanya Technology's revenue will grow by 14.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -14.9% today to 20.5% in 3 years time.
• Analysts expect earnings to reach NT$10.6 billion (and earnings per share of NT$-0.19) by about January 2028, up from NT$-5.1 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 13.9x on those 2028 earnings, up from -18.3x today. This future PE is lower than the current PE for the TW Semiconductor industry at 29.1x.
• 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 8.34%, as per the Simply Wall St company report.

Nanya Technology Future Earnings Per Share Growth

Risks

• Nanya Technology experienced a significant decline in revenue, with Q4 2024 net sales down by 19.2% from Q3, primarily due to decreased average selling prices (ASP) and bit shipments, which directly impacts revenue and earnings.
  
• The company reported a negative gross profit and net income, which highlights the ongoing struggles with profitability and net margins.
  
• Despite some improvement year-over-year, Nanya continues to forecast net losses with a 2024 full-year net income of minus NT$5.0 billion, signaling financial instability and impacting earnings per share negatively.
  
• The market demand for PC, mobile, and consumer products remains weak outside of the AI sector, suggesting a potential negative impact on future revenue growth if these sectors do not see recovery as expected.
  
• There are uncertainties surrounding the company’s plans to significantly increase production of DDR5 and other advanced memory technologies, with risks linked to market conditions and the ability to achieve projected production targets, which could affect both revenue and operating margins.

Valuation

• The analysts have a consensus price target of NT$37.51 for Nanya 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$85.0, and the most bearish reporting a price target of just NT$20.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$51.8 billion, earnings will come to NT$10.6 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 8.3%.
• Given the current share price of NT$30.1, the analyst's price target of NT$37.51 is 19.8% 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.