LEAP Expansion And US Entry Will Unlock New Horizons

Key Takeaways

• Strong growth in advanced packaging services and AI chip testing is expected to enhance revenue and margins.
  
• Expansion into the U.S. market could offer diversification and mitigate geopolitical risks, stabilizing income.
  
• Potential volatility from changing fundamentals, geopolitical factors, and expansion plans could impact revenue stability, margins, and profitability if costs and demand forecasts are mismanaged.

Catalysts

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

• The expected strong growth in the LEAP (leading-edge advanced packaging) services from 2024 levels, driven by increasing demand for AI, networking, and communications products, is anticipated to positively impact revenue and gross margins.
  
• The company's aggressive expansion in its test business, including AI chips testing, is positioned to be margin-accretive and is expected to improve both operating and net margins as the test portion of the business grows from its current 18% towards the projected 20% of overall ATM revenue.
  
• The company's proactive investment in machinery and equipment, specifically for leading-edge packaging operations, aligns with the trends favoring high-specification AI and next-gen communication products, which could drive substantial revenue growth and enhance EBITDA.
  
• Potential expansion into the U.S. market offering LEAP technologies could provide geographic diversification and open new revenue streams, at the same time reducing geopolitical risks associated with tariffs, thereby stabilizing net income.
  
• The sustained strategic focus on adapting to core technological trends in package-based connectivity and process technology improvement suggests a commitment to long-term operating profitability and maintaining or improving net operating margins.

ASE Technology Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming ASE Technology Holding's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.5% today to 8.5% in 3 years time.
• Analysts expect earnings to reach NT$73.8 billion (and earnings per share of NT$17.09) by about May 2028, 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 15.2x on those 2028 earnings, down from 18.1x today. This future PE is lower than the current PE for the US Semiconductor industry at 23.4x.
• 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 9.86%, as per the Simply Wall St company report.

ASE Technology Holding Future Earnings Per Share Growth

Risks

• The company's financial results may be subject to volatility due to rapidly changing business fundamentals, potentially affecting long-term strategic decisions and overall revenue stability.
  
• There are concerns about the effects of geopolitical factors and trade tariffs, which may lead to supply chain disruptions and a decline in net margins if additional costs cannot be absorbed or passed onto customers.
  
• The planned expansion into the U.S. is still under evaluation and lacks firm investment details, which introduces uncertainty in terms of capital allocation and may affect return on equity if outcomes are unfavorable.
  
• Increased operating expenses related to R&D and expansion could pressure operating margins if revenue growth does not keep pace, impacting earnings negatively.
  
• High capital expenditure commitments for advanced packaging and testing infrastructure carry the risk of inadequate economic returns if demand forecasts are overly optimistic, potentially affecting profitability and net income.

Valuation

• The analysts have a consensus price target of NT$191.941 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$160.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$866.1 billion, earnings will come to NT$73.8 billion, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 9.9%.
  
• Given the current share price of NT$135.5, the analyst price target of NT$191.94 is 29.4% 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.