EV And IoT Demand Will Expand Automated Test Markets

Key Takeaways

• Surging semiconductor and automation demand are fueling outperformance, boosting revenue and margins as Chroma capitalizes on device proliferation and digital transformation trends.
  
• Expanding global customer base and deepening partnerships in high-growth regions are enhancing income stability and driving structurally higher profitability.
  
• Heavy reliance on China, concentrated customer base, and limited business visibility expose Chroma ATE to major risks from industry cycles, geopolitical shifts, and internal client changes.

Catalysts

Designs, assembles, manufactures, sells, repairs, and maintains software/hardware for computers and peripherals, computerized automatic test systems, electronic test instruments, signal generators, power supplies, and telecom power supplies in Taiwan, China, the United States, and internationally.

• While analyst consensus expects a recovery in EV and energy storage markets by 2025, the extraordinary 55% year-on-year revenue growth in Q1 2025 and record-high operating and net incomes indicate that Chroma is already experiencing a much sharper rebound than peers, suggesting that revenues could significantly surpass consensus over the next 12–24 months.
  
• Analysts broadly agree that semiconductors and photonics will drive over 50% of revenue in 2025, but with semiconductor segment growth reaching 118% year-on-year in Q1 and new high-value metrology equipment already shipping, Chroma is likely to see this segment far outperform expectations, with outsize positive impact on both revenue growth and gross margins through new product ASPs.
  
• Chroma's expansion into automation and high-power testing for AI infrastructure and 5G devices appears to be in a sustained supercycle, with automation-related segment sales up over 300% year-on-year, positioning the company to capture structural growth from the accelerating global push towards smart factories and data center buildouts, which will strongly boost long-term top-line and recurring software and integration revenue.
  
• Rapid increases in global complexity and performance requirements for electronic systems, including wearables, automotive, and AI/HPC hardware, are fueling multi-year demand for Chroma's advanced test solutions, making above-market revenue compounding increasingly likely as device proliferation and digital transformation deepen across all key markets.
  
• The company's broadening international customer base, especially penetration of new regions and growing orders from major cloud providers and auto/gaming chipmakers, is reducing earnings risk and driving operating leverage, which elevates both net income visibility and prospects for sustainably higher return on equity through the cycle.

Chroma ATE Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Chroma ATE compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Chroma ATE's revenue will grow by 19.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 26.7% today to 25.0% in 3 years time.
• The bullish analysts expect earnings to reach NT$10.3 billion (and earnings per share of NT$24.29) by about July 2028, up from NT$6.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 25.2x on those 2028 earnings, down from 28.3x today. This future PE is greater than the current PE for the TW Electronic industry at 19.3x.
• 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 6.61%, as per the Simply Wall St company report.

Chroma ATE Future Earnings Per Share Growth

Risks

• Heavy dependence on the Chinese market, especially for 5G-related power devices and AI infrastructure buildout, places Chroma ATE's revenues and profits at risk should there be a slowdown in China or if regional tensions, deglobalization, or regulatory changes disrupt business conditions.
  
• Chroma ATE's high customer concentration within the semiconductor and electronics sectors risks destabilizing future revenue and margins, as indicated by significant exposure to a small group of large customers with potentially volatile CapEx cycles.
  
• There is evidence that end-market semiconductor and power test equipment demand is driven by cyclical and one-off infrastructure buildouts, not just secular growth, leaving revenues vulnerable to industry downturns, market saturation, or shifts in customer CapEx priorities.
  
• The company's lack of visibility beyond the short-term, with order books and guidance only covering the next two to three months and management declining to provide clear long-term guidance, suggests underlying uncertainty that could lead to revenue and earnings volatility.
  
• Persistent macro uncertainties, including potential tariff escalations, changing global supply chains, and the risk of increasing in-house testing capability among major semiconductor clients, could shrink Chroma ATE's total addressable market and severely compress both topline sales and net margins.

Valuation

• The assumed bullish price target for Chroma ATE is NT$505.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Chroma ATE's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$505.0, and the most bearish reporting a price target of just NT$350.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be NT$41.0 billion, earnings will come to NT$10.3 billion, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 6.6%.
• Given the current share price of NT$429.5, the bullish analyst price target of NT$505.0 is 15.0% 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.