Shift To Advanced Packaging And Testing Services Will Drive Future Opportunities

Key Takeaways

• Shifts towards advanced packaging and testing services are expected to boost revenue and improve gross margins due to higher service complexity.
  
• Strategic partnerships and overseas expansion are projected to drive long-term revenue growth and enhance operating leverage.
  
• Rising expenses, competitive pressures, and demand shortfalls pose risks to margins and revenue growth, impacting ASE Technology's financial performance.

Catalysts

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

• ASE Technology Holding is investing heavily in leading-edge advanced packaging and testing operations, expecting a doubling of related revenues for 2025, which should positively impact revenue and future growth.
  
• The increasing shift towards advanced packaging and leading-edge services is anticipated to enhance revenue and improve gross margins due to higher ASPs and more complex service offerings.
  
• Planned overseas expansion and new customer engagements are expected to drive higher revenue growth as the market for advanced semiconductor applications grows.
  
• The growing proportion of business from the test segment, which is outpacing assembly services, is anticipated to support margin improvements due to higher margins associated with testing services.
  
• Strategic partnerships and increasing demand for leading-edge technologies are projected to lead to higher revenue and operating leverage, which could enhance net margins and earnings stability over the long term.

ASE Technology Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASE Technology Holding's revenue will grow by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 10.0% in 3 years time.
• Analysts expect earnings to reach NT$81.2 billion (and earnings per share of NT$18.58) by about December 2027, up from NT$32.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2027 earnings, down from 20.8x today. This future PE is lower than the current PE for the US Semiconductor industry at 32.1x.
• Analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

ASE Technology Holding Future Earnings Per Share Growth

Risks

• The financial results highlight an increase in operating expenses driven by labor, R&D, and administrative costs, which could impact net margins and earnings.
  
• Increasing capital intensity and front-loaded investments in advanced production capabilities may not immediately translate into expected revenues, potentially affecting cash flow and financial returns.
  
• The company acknowledges that the general demand recovery has not materialized as expected, with some business segments showing lackluster demand, which could impact revenue growth.
  
• Competitive pressures in advanced packaging with partnerships and investments from competitors such as TSMC and Amkor could impact market share and profitability.
  
• The EMS business faces challenges with earlier-than-expected seasonality, higher costs, and overseas expansion, which may lead to declining margins and affect overall earnings.

Valuation

• The analysts have a consensus price target of NT$176.81 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$212.5, 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 2027, revenues will be NT$816.0 billion, earnings will come to NT$81.2 billion, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 8.5%.
• Given the current share price of NT$156.0, the analyst's price target of NT$176.81 is 11.8% 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.