Semiconductor And Photonics Sectors Will Account For Over 50% Of Sales In 2025

Key Takeaways

• Anticipated recovery in EV and ESS markets and growth in semiconductor and photonics sectors could significantly boost Chroma's revenue.
  
• Strategic R&D investment and new product launches may enhance competitive edge and long-term earnings for Chroma.
  
• Market competition and technological demand pose risks to future revenue, while one-time capital gains and increased R&D spending may affect sustainable growth.

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 expects a recovery in the Electric Vehicle (EV) and Energy Storage Systems (ESS) markets in 2025, particularly with demand for 5G power devices. This could drive an increase in revenue as these sectors begin to rebound from previous low sentiment levels.
  
• The semiconductor and photonics sectors are expected to continue as major growth drivers, with Chroma anticipating that these sectors will contribute more than 50% of the company's sales revenue in 2025, impacting overall revenue positively.
  
• Chroma plans to launch new metrology equipment sales starting in 2025, targeting demand from AI, HPC, and new auto and gaming chips, which could further boost revenue growth from the semiconductor segment.
  
• A significant capital gain of approximately NT$3 billion is expected in 2025 from the transfer of a developed residential area to employees. This one-time gain is likely to positively impact the net income and EPS for the year.
  
• Continued investment in R&D, with expenses targeted around 11% to 12% of revenue, suggests that Chroma is focusing on innovation and maintaining a competitive edge, potentially leading to higher long-term earnings through new product development.

Chroma ATE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chroma ATE's revenue will grow by 19.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.4% today to 26.7% in 3 years time.
• Analysts expect earnings to reach NT$9.7 billion (and earnings per share of NT$23.13) by about March 2028, up from NT$5.3 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 23.6x on those 2028 earnings, down from 25.7x today. This future PE is greater than the current PE for the TW Electronic industry at 23.0x.
• Analysts expect the number of shares outstanding to decline by 0.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.67%, as per the Simply Wall St company report.

Chroma ATE Future Earnings Per Share Growth

Risks

• The ATS sector experienced a decline of 16% year-on-year due to low sentiment in the EV and ESS markets, which could negatively impact overall revenue if recovery does not occur as expected.
  
• The revenue from semiconductor and photonics sectors, although strong, is highly dependent on the continued demand for AI, HPC, and new auto and gaming chips, which introduces risks to future earnings if such demand falters.
  
• The reliance on residential project capital gains, estimated at NT$3 billion, as part of 2025 financial performance may skew earnings upward for this year, but this is a one-time gain and not a sustainable revenue source.
  
• There is increased R&D expense targeted at maintaining competitive advantage, indicating an aggressive growth strategy, but if returns on these innovations do not materialize, it could decrease net margins.
  
• Market competition and potential new entrants in semiconductor metrology could challenge Chroma's current position, impacting future revenue growth if they fail to maintain technological leadership.

Valuation

• The analysts have a consensus price target of NT$452.667 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$505.0, and the most bearish reporting a price target of just NT$322.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NT$36.5 billion, earnings will come to NT$9.7 billion, and it would be trading on a PE ratio of 23.6x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of NT$319.5, the analyst price target of NT$452.67 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.