Investing In R&D And Smart Factories Will Prepare For AI-Led Super Cycle

Key Takeaways

• Growth in advanced packaging and testing, driven by AI demand, can significantly boost ATM segment revenue and net margins.
  
• Strategic geographic diversification and investments in R&D prime ASE to capitalize on semiconductor market growth and mitigate geopolitical risks.
  
• Increasing operating expenses and reliance on advanced packaging and testing revenues present financial risks, impacting margins and revenue stability amidst currency fluctuations and high capital expenditures.

Catalysts

Provides semiconductors packaging and testing, and electronic manufacturing services in the United States, Taiwan, Asia, Europe, and internationally.

• ASE Technology Holdings is expected to see significant growth in its leading-edge advanced packaging and testing business, projected to increase by $1 billion in 2025, driven by strong demand in AI and related technologies. This is likely to boost revenue growth for the ATM segment.
  
• The company is investing heavily in R&D and smart factory buildings to prepare for an AI-led super cycle. This investment is anticipated to improve operational efficiencies and bolster revenue and net margins as demand increases.
  
• ASE's strategic geographic diversification and comprehensive technology offerings position it well to capitalize on the expected $1 trillion semiconductor market in the next decade. This could enhance revenue growth and solidify its market positioning, supporting sustained earnings.
  
• Continued expansion of test business, expected to grow at twice the rate of packaging, is set to contribute a substantial portion of future revenue, with target margins around 35%. This focus on high-margin business segments is likely to positively impact overall earnings.
  
• The company is preparing to support new U.S. BIS regulations by potentially shifting production from China to Taiwan, which may result in unlocking additional revenue streams and minimizing geopolitical risks, thereby improving long-term revenue potential.

ASE Technology Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASE Technology Holding's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 8.8% in 3 years time.
• Analysts expect earnings to reach NT$75.6 billion (and earnings per share of NT$18.02) by about March 2028, up from NT$32.5 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 14.5x on those 2028 earnings, down from 21.1x today. This future PE is lower than the current PE for the US Semiconductor industry at 27.9x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.13%, as per the Simply Wall St company report.

ASE Technology Holding Future Earnings Per Share Growth

Risks

• The company's operating expenses have been increasing significantly due to investments in leading-edge advanced packaging and testing, R&D, and labor-related costs, which could pressure net margins if revenue growth does not cover these expenses.
  
• A heavy reliance on leading-edge packaging and testing revenues for growth presents risk if demand shifts unexpectedly, particularly given that 75% of the expected USD 1 billion increase in revenue in 2025 is tied to this area, potentially impacting revenue stability.
  
• Operating profit and margin have declined due to higher compensation and ramp-up expenses as well as geographical expansion, indicating challenges in managing cost structures which could affect future earnings.
  
• Currency fluctuations have impacted margins, with the NT dollar's appreciation and depreciation causing adjustments in gross and operating margins, which could further affect financial performance if currency trends continue unpredictably.
  
• High capital expenditures on new machinery, equipment, and facilities to support advanced technology adoption create a long-term ROI risk, particularly if there are delays or execution difficulties in meeting projected revenue growth from these investments.

Valuation

• The analysts have a consensus price target of NT$191.583 for ASE Technology Holding 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$215.0, and the most bearish reporting a price target of just NT$122.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$859.6 billion, earnings will come to NT$75.6 billion, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 9.1%.
• Given the current share price of NT$158.0, the analyst price target of NT$191.58 is 17.5% 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.