Accelerating AI And 5G Trends Will Drive Industry Expansion

Key Takeaways

• Accelerating demand from AI, high-performance computing, and electrification trends is fueling strong order growth and expanding market opportunities.
  
• Emphasis on advanced, proprietary testing platforms and disciplined margin management supports pricing power, technology leadership, and sustained profitability improvements.
  
• Heavy reliance on the testing equipment sector and recent margin outperformance expose the company to demand cycles, inventory risk, and future margin or earnings volatility.

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.

• Chroma ATE is experiencing substantial order growth in Testing Instruments and Automated Test Systems (ATS), driven by accelerating demand for AI server, data center power applications, and high-performance computing chips; this aligns with the rapid expansion of AI, IoT, and 5G adoption, supporting continued top-line (revenue) growth into 2026 and beyond.
  
• Strong momentum in Metrology equipment and System Level Testers (SLT)-with increasing orders from advanced semiconductor packaging, AI/HPC, and autonomous driving chip manufacturers-positions the company to capture higher average selling prices and longer testing cycle times, which benefits revenue and gross margins.
  
• The global push toward electrification (including increasing adoption of EVs and renewable energy) is expanding Chroma ATE's addressable market for power electronics and battery testing solutions, creating new business opportunities and sustaining multi-year revenue growth.
  
• Chroma ATE's strategy of advancing proprietary testing platforms and new tool generations-capable of handling next-gen GPU power and multi-die architectures-enables sustainable pricing power and technology leadership, supporting margin expansion and improved earnings quality.
  
• A disciplined focus on maintaining high gross margins and scaling operating leverage during rapid revenue expansion (as demonstrated by record margins and growing return on equity) indicates that greater scale and recurring revenue opportunities can drive further improvements in operating margins and net income.

Chroma ATE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chroma ATE's revenue will grow by 14.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 27.9% today to 28.8% in 3 years time.
• Analysts expect earnings to reach NT$10.9 billion (and earnings per share of NT$24.24) by about September 2028, up from NT$7.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NT$9.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.4x on those 2028 earnings, down from 33.2x today. This future PE is greater than the current PE for the TW Electronic industry at 23.5x.
• 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 6.62%, as per the Simply Wall St company report.

Chroma ATE Future Earnings Per Share Growth

Risks

• Over 95% of Chroma ATE's revenue remains heavily concentrated in the testing equipment business, making the company vulnerable to any cyclical downturns in demand for testing equipment or customer delay in capex, which could reduce future revenue and earnings.
  
• Revenue growth in core sectors like semiconductor and photonics appears to be driven by new technologies and AI/HPC chip cycles; any slowdown in AI/server adoption, delays in next-gen chip launches, or customers developing in-house testing solutions could weaken growth and impact the top line and operating margins.
  
• Recent margin strength is credited to favorable product mix and strong customer demand in emerging technologies, but management notes that such record-high margins may not be sustainable each quarter, signaling future potential margin volatility and pressure on net margins.
  
• Significant jump in inventory year-over-year (12% increase) could indicate risk of overproduction if demand expectations do not materialize; this may lead to write-downs or lower gross margins if inventory needs to be discounted or written off.
  
• Non-operating income, including recent reliance on mark-to-market investment gains to offset FX losses, represents a non-recurring source of profit; volatility in FX or a lack of similar investment gains in the future could negatively affect overall net income stability.

Valuation

• The analysts have a consensus price target of NT$518.75 for Chroma ATE 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$580.0, and the most bearish reporting a price target of just NT$430.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$37.8 billion, earnings will come to NT$10.9 billion, and it would be trading on a PE ratio of 24.4x, assuming you use a discount rate of 6.6%.
• Given the current share price of NT$546.0, the analyst price target of NT$518.75 is 5.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.