AI Advancements And Automotive Collaborations Will Shape The Future

Key Takeaways

• MediaTek's strategic focus on AI and connectivity boosts revenue growth and margins, leveraging advanced models and expanding ASP in high-end segments.
  
• Collaborations in automotive and advancements in WiFi and edge platforms diversify revenue streams and enhance operating income through innovation and market adoption.
  
• MediaTek faces potential challenges in maintaining margins and efficiency due to rising costs, decreased quarterly profit metrics, and risky reliance on emerging technologies and AI market expansion.

Catalysts

Engages in the research, development, production, manufacture, and marketing of multimedia integrated circuits (ICs) in Taiwan, rest of Asia, and internationally.

• MediaTek's strong revenue growth in 2024, driven by gains in AI flagship SoCs and connectivity products, positions it to positively impact future revenue and net margin through continued market expansion and increased ASP (Average Selling Price) from high-end AI-capable models.
  
• The company's advancements in enterprise ASIC solutions, particularly for data center AI accelerators, and expected revenue contribution from 2-nanometer and 3-nanometer processes starting in 2026, could significantly boost overall revenue and gross margin due to higher ASP and increased demand.
  
• MediaTek's collaboration with automotive giants and the development of Dimensity Auto platform, coupled with its co-design partnership with NVIDIA for premium cockpit SoCs, may enhance revenue diversification and operating income as the automotive market adopts more advanced technologies.
  
• The accelerating adoption of WiFi 7, and MediaTek's expansion into smart edge platforms, which demonstrated 24% year-over-year growth, are likely to continue improving product mix and blended ASP, impacting revenue positively.
  
• The company's focus on AI democratization, with projected growth in edge AI devices and the anticipated release of innovative products like the world's first personal AI supercomputer, is expected to drive both revenue and operating margin growth through increased sales volume and premium pricing of products with new AI capabilities.

MediaTek Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MediaTek's revenue will grow by 14.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.1% today to 19.0% in 3 years time.
• Analysts expect earnings to reach NT$153.3 billion (and earnings per share of NT$104.6) by about March 2028, up from NT$106.4 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NT$171.1 billion in earnings, and the most bearish expecting NT$133.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.0x on those 2028 earnings, up from 21.9x today. This future PE is lower than the current PE for the TW Semiconductor industry at 27.9x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.88%, as per the Simply Wall St company report.

MediaTek Future Earnings Per Share Growth

Risks

• Despite a robust financial performance in 2024, MediaTek's operating income for the fourth quarter decreased both sequentially and year-over-year, which could indicate challenges in maintaining efficiency or cost control, potentially impacting future earnings.
  
• The company's gross margin fell in the fourth quarter compared to the previous quarter, reflecting potential pricing pressure or increased costs that could affect profitability if these trends continue.
  
• The net profit margin for the fourth quarter decreased compared to both the sequential and year-ago periods, suggesting that MediaTek might face challenges that could squeeze margins, impacting net income.
  
• Operating expenses have increased significantly from the previous year, which, if not accompanied by proportional revenue growth, could erode net margins.
  
• The significant reliance on AI market expansion and emerging technology investments, like cloud and enterprise ASICs, present risks related to execution and market adoption, which could affect projected revenue growth if expectations do not materialize as quickly.

Valuation

• The analysts have a consensus price target of NT$1675.627 for MediaTek 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$2000.0, and the most bearish reporting a price target of just NT$1275.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$804.6 billion, earnings will come to NT$153.3 billion, and it would be trading on a PE ratio of 22.0x, assuming you use a discount rate of 7.9%.
• Given the current share price of NT$1465.0, the analyst price target of NT$1675.63 is 12.6% 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.