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Gen 45 Micro LED Transition And AI PC Demand Set To Propel Revenue And Profitability

WA
Consensus Narrative from 10 Analysts

Published

December 21 2024

Updated

December 21 2024

Narratives are currently in beta

Key Takeaways

  • Asset revitalization and strategic investments are expected to boost earnings and liquidity while positioning AUO for enhanced market presence.
  • Synergies from consolidation and rising demand in new tech applications drive revenue growth and improve margins in key segments.
  • Financial vulnerabilities due to high debt and macro uncertainties, coupled with setbacks in solar projects, jeopardize AUO's revenue growth and net earnings.

Catalysts

About AUO
    Researches, develops, produces, and sells thin film transistor liquid crystal displays (TFT-LCDs) and other flat panel displays for various applications.
What are the underlying business or industry changes driving this perspective?
  • The transformation strategy focused on asset revitalization, including the completion of asset transfers such as the Tainan plant, is expected to contribute to profits and reduce capital expenditures, impacting overall earnings and liquidity positively.
  • The ongoing synergies from the AUO and BHTC consolidation, specifically in penetrating new markets with integrated display HMI solutions, are anticipated to drive revenue growth and improve profitability in the Mobility Solution segment.
  • The strategic investment and acquisition in key companies to enhance Vertical Solution capabilities position AUO to deliver integrated solutions across various sectors, which is expected to increase revenue and potentially improve net margins.
  • The transition to Gen 4.5 for micro LED production aims to enhance manufacturing efficiency and yield rates, reducing costs and boosting gross margins as the technology gains traction in automotive and other applications.
  • Increasing demand for AI PCs, necessitating more efficient LTPS displays, is set to drive growth in the IT segment, potentially lifting revenue and improving unit economics in the Display business.

AUO Earnings and Revenue Growth

AUO Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming AUO's revenue will grow by 6.8% annually over the next 3 years.
  • Analysts assume that profit margins will increase from -2.3% today to 2.8% in 3 years time.
  • Analysts expect earnings to reach NT$9.2 billion (and earnings per share of NT$1.76) by about December 2027, up from NT$-6.2 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 13.9x on those 2027 earnings, up from -17.8x today. This future PE is lower than the current PE for the US Electronic industry at 25.7x.
  • Analysts expect the number of shares outstanding to decline by 11.95% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 9.54%, as per the Simply Wall St company report.

AUO Future Earnings Per Share Growth

AUO Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • The Vertical Solution business faced a setback due to the completion of large-scale solar projects and decreased demand for solar modules, which could negatively impact revenue growth in this segment.
  • The company experienced a net loss partly due to increased operating expenses related to moving and disposing non-essential assets, which could further affect net margins if not managed properly.
  • There is an inherent risk in AUO's reliance on advance procurement by branded customers; with the Display segment entering a seasonal downturn, this could result in lowered quarterly and possibly annual revenues.
  • The high level of short-term and long-term debt compared to cash reserves, as indicated by a 33.4% gearing ratio, suggests financial vulnerabilities that could affect net earnings and liquidity.
  • Macro uncertainties such as geopolitical tensions and changes in global economic policies could adversely affect market demand, which might impact AUO's revenue and earnings projections.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of NT$18.6 for AUO 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$22.5, and the most bearish reporting a price target of just NT$15.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be NT$334.4 billion, earnings will come to NT$9.2 billion, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 9.5%.
  • Given the current share price of NT$14.4, the analyst's price target of NT$18.6 is 22.6% 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.

How well do narratives help inform your perspective?

Disclaimer

Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Read more narratives

Fair Value
NT$18.6
22.6% undervalued intrinsic discount
WarrenAI's Fair Value
Future estimation in
PastFuture0100b200b300b400b2013201620192022202420252027Revenue NT$490.0bEarnings NT$13.5b
% p.a.
Decrease
Increase
Current revenue growth rate
6.57%
Electronic Equipment and Components revenue growth rate
0.45%