Regulatory Pressure And Oversupply Will Erode Legacy LCD Margins

Key Takeaways

• Slow adaptation to advanced display technologies risks long-term market share loss and persistent margin compression amid regulatory and competitive pressures.
  
• Traditional panel business faces dwindling demand, global oversupply, and shrinking addressable market, threatening both earnings stability and future revenue growth.
  
• Strategic shift toward high-margin segments, asset-light transformation, and expansion in automotive and AI-driven solutions positions AUO for long-term growth, profit stability, and resilience.

Catalysts

Engages in the research, development, production, and sale of thin film transistor liquid crystal displays (TFT-LCDs) and other flat panel displays for various applications.

• Despite management's emphasis on transformation and diversification, AUO remains heavily exposed to the risk that regulatory shifts toward energy efficiency and sustainability will further accelerate the decline in demand for conventional LCDs, resulting in persistent revenue deterioration as consumers and governments favor next-generation, eco-friendlier display technologies.
  
• AUO's core display business continues to be exposed to global overcapacity and ongoing price erosion, and while inventory controls have improved, the long-term oversupply in traditional panel manufacturing threatens to compress gross margins and undermine earnings power even if short-term cost management remains effective.
  
• A slower pivot from AUO into OLED, MicroLED, and other next-generation display technologies relative to international peers may lead to long-term market share loss; as competitors ramp up advanced offerings, AUO risks losing major contracts and facing structurally lower pricing, further straining both top-line growth and net profits.
  
• The ongoing migration of display manufacturing to lower-cost regions, especially in Southeast Asia and India, could erode AUO's competitive position, as its mixed global footprint may not be enough to offset pricing pressure from emerging market competitors, leading to persistent margin compression over the coming years.
  
• Increased vertical integration by downstream customers, alongside the rise of alternative display technologies and flexible work and education models, is poised to shrink AUO's addressable market for traditional panels; this structural trend threatens to weigh on area shipments, revenue growth, and ultimately the company's free cash flow generation.

AUO Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on AUO compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming AUO's revenue will grow by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 2.1% today to 1.3% in 3 years time.
• The bearish analysts expect earnings to reach NT$4.0 billion (and earnings per share of NT$0.51) by about September 2028, down from NT$5.9 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 bearish analyst cohort, the company would need to trade at a PE ratio of 30.6x on those 2028 earnings, up from 16.0x today. This future PE is greater than the current PE for the US Electronic industry at 22.8x.
• Analysts expect the number of shares outstanding to decline by 1.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.81%, as per the Simply Wall St company report.

AUO Future Earnings Per Share Growth

Risks

• AUO is shifting its revenue mix toward higher-margin Mobility Solutions and Vertical Solutions, aiming for these segments to contribute over half of total revenue by 2027; this strategic focus on automotive displays, smart retail, and sustainable solutions could drive recurring earnings growth and margin expansion over the long term.
  
• The company is leveraging global manufacturing diversification and asset-light transformation, selling or revitalizing idle assets while reducing CapEx, which should support financial resilience, free up capital for new growth areas, and stabilize profit margins.
  
• AUO's automotive display segment is showing strong order momentum from major OEMs, recent capacity expansions in Europe, and high confidence in achieving a double-digit compound annual growth rate, suggesting robust long-term revenue and earnings potential from the growing automotive electronics market.
  
• The consolidation of ADLINK, with its leading capabilities in edge computing and AI-related solutions, significantly enhances AUO's vertical solution ecosystem and positions the company to benefit from secular trends such as digital transformation and smart infrastructure, supporting higher-value revenue streams and potentially improving net profits.
  
• Despite near-term ForEx headwinds, the company's improved product mix-emphasizing high-end, value-added displays like gaming monitors, touch panels, and micro LED products-has delivered consecutive quarters of profitability and increased gross margins, indicating a viable path to sustainable earnings even if overall industry volumes fluctuate.

Valuation

• The assumed bearish price target for AUO is NT$12.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of AUO's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NT$18.8, and the most bearish reporting a price target of just NT$12.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be NT$311.9 billion, earnings will come to NT$4.0 billion, and it would be trading on a PE ratio of 30.6x, assuming you use a discount rate of 10.8%.
• Given the current share price of NT$12.55, the bearish analyst price target of NT$12.5 is 0.4% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts 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.