Edge AI Investments Will Drive Future Innovation In Semiconductor And Healthcare Sectors

Key Takeaways

• Strategic investments in Edge AI and software engineering aim to drive growth and innovation, enhancing revenue through high-value product development.
  
• Expansion efforts and efficient expense management support revenue growth, with a strong pipeline in the U.S. promising increased earnings.
  
• Significant revenue decline and competitive pressures, along with increased operational costs, raise concerns about sustaining profitability and effective growth strategy.

Catalysts

Manufactures and sells embedded computing boards, industrial automation products, and applied and industrial computers.

• Advantech's strategic investments in R&D, particularly in Edge AI and software engineering, aim to drive future growth and innovation, potentially enhancing revenue and gross margins as new high-value products are developed and launched.
  
• The positive B/B ratio trend and significant design wins in the U.S. market, particularly in the semiconductor and healthcare sectors, indicate a strong pipeline that could boost revenue and earnings in the upcoming quarters.
  
• Advantech's expansion efforts in the U.S. and Taiwan, including new offices and manufacturing facilities, are expected to support increased demand in key markets, likely positively impacting revenue growth and operating margins.
  
• The efficient management of operational expenses, despite increased R&D investment, aims to maintain or improve net margins while facilitating strategic growth, particularly in emerging Edge AI markets.
  
• The company’s ongoing focus on cost optimization and competitive pricing in China, supported by a local growth team, positions it for potential revenue recovery and stabilization in this challenging market.

Advantech Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Advantech's revenue will grow by 11.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 14.8% today to 15.8% in 3 years time.
• Analysts expect earnings to reach NT$12.8 billion (and earnings per share of NT$14.81) by about December 2027, up from NT$8.7 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NT$14.2 billion in earnings, and the most bearish expecting NT$11.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.9x on those 2027 earnings, down from 35.1x today. This future PE is greater than the current PE for the TW Tech industry at 26.6x.
• Analysts expect the number of shares outstanding to grow by 0.15% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

Advantech Future Earnings Per Share Growth

Risks

• Advantech's revenue has shown a significant year-on-year decline, with a 12% decrease in sales revenue for the first nine months of 2024, reflecting challenges in maintaining growth and impacting overall earnings.
  
• Operating margins have declined due to increased operational expenses, such as the ESOP expenses, and strategic investments in R&D, particularly in Edge AI, which could further pressure net margins.
  
• Key regions, including North America and Europe, experienced substantial sales declines year-on-year (17% and 27% respectively), indicating potential ongoing revenue risks in these markets.
  
• Competitive pressures in the China market have led to a 2% reduction in selling prices, impacting gross margins in that region and highlighting the difficulty in sustaining profitability.
  
• The integration of AURES, while increasing revenue, is expected to have a slightly negative impact on consolidated gross and operating profits, raising concerns about the overall benefit of the merger to financial performance.

Valuation

• The analysts have a consensus price target of NT$354.43 for Advantech 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$410.0, and the most bearish reporting a price target of just NT$278.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NT$81.5 billion, earnings will come to NT$12.8 billion, and it would be trading on a PE ratio of 28.9x, assuming you use a discount rate of 6.5%.
• Given the current share price of NT$351.5, the analyst's price target of NT$354.43 is 0.8% higher. 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.