Slow Digital Adoption Will Restrain Sales Though Margins Will Stabilize

Key Takeaways

• Slow adoption by traditional customers and weak short-term revenues are delaying expected growth, despite long-term industry trends favoring Kornit's digital solutions.
  
• Customer hesitancy and competition from internal or alternative technologies may limit market expansion and slow the ramp-up of recurring and system sales.
  
• Slower adoption of new models, longer sales cycles, and reliance on a concentrated customer base threaten predictable revenues, margin stability, and sustainable growth.

Catalysts

Develops, designs, and markets digital printing solutions for the fashion, apparel, and home decor segments of printed textile industry in the United States, Europe, the Middle East, Africa, the Asia Pacific, and internationally.

• While on-demand production and the conversion of analog to digital in textile manufacturing point to a vast, incremental addressable market for Kornit over the long term, the company continues to experience elongated sales cycles and slow adoption among traditional screen printers, which is likely to delay top-line revenue growth and the anticipated ramp in recurring revenues into 2026.
  
• Despite industry-wide regulatory and consumer shifts toward sustainable, digital textile production that align well with Kornit's solutions, short-term consumables and service revenue have been weak due to temporary inventory destocking and a slower pace of upgrades, putting near-term pressure on gross margins and earnings.
  
• Although the move toward software-driven, recurring revenue models positions Kornit for potential margin expansion and earnings stability over time, ARR (annual recurring revenue) is currently tracking below internal forecasts due to customer education hurdles and the complexity of converting customers from traditional capital expenditure buying models, suggesting slower improvement in bottom-line profitability.
  
• While the company's innovation and expanded product lineup have led to a clear increase in production impressions and some large-scale customer wins, the full realization of benefits from new product introductions such as the Apollo platform is challenged by the hesitancy of new customers, which may weigh on system sales and recurring consumables revenue in the near future.
  
• Although automation, customization, and integration trends support long-term adoption of Kornit's technology, the risk remains that large apparel manufacturers accelerate internalization of similar digital print technologies or that alternative fabric decoration technologies gain traction, potentially limiting Kornit's addressable market and future revenue streams.

Kornit Digital Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kornit Digital compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kornit Digital's revenue will grow by 7.4% annually over the next 3 years.
• The bearish analysts are not forecasting that Kornit Digital will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Kornit Digital's profit margin will increase from -5.4% to the average US Machinery industry of 9.9% in 3 years.
• If Kornit Digital's profit margin were to converge on the industry average, you could expect earnings to reach $25.4 million (and earnings per share of $0.67) by about September 2028, up from $-11.3 million 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 39.8x on those 2028 earnings, up from -57.5x today. This future PE is greater than the current PE for the US Machinery industry at 24.0x.
• Analysts expect the number of shares outstanding to decline by 5.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.02%, as per the Simply Wall St company report.

Kornit Digital Future Earnings Per Share Growth

Risks

• Kornit Digital's growth in subscription-based recurring revenues and AIC model is tracking below internal expectations, as slower-than-anticipated customer adoption and internal debate between CapEx and AIC offerings could limit the ramp of predictable high-margin revenues, putting pressure on earnings stability over time.
  
• Lengthening sales cycles for new system placements, especially for Apollo machines in the screen printing segment, indicate greater-than-expected adoption barriers and customer risk aversion, which may delay meaningful revenue contribution from new product introductions and slow top-line growth in the medium term.
  
• Declines in service and consumables revenues-driven by inventory destocking at major customers and fewer Atlas MAX upgrades-reflect underlying volatility and dependence on a small customer base, raising the risk of weaker future revenues if similar dynamics recur or if broader demand softens.
  
• Gross margin erosion compared to the prior year, resulting from a higher mix of system sales and declining consumable and service revenues, suggests the company could face sustained margin compression if product mix shifts persist or if recurring revenues do not accelerate, ultimately impacting net margins and bottom-line profitability.
  
• The transition to selling into the analog-dominated screen market remains in early stages, and the measured pace of digital adoption, combined with the need for lighthouse customer validation and customization for analog workflows, implies Kornit may realize lower-than-anticipated revenue ramp and faces ongoing execution risk as industry digitization proves slower and less predictable than projected.

Valuation

• The assumed bearish price target for Kornit Digital is $20.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Kornit Digital'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 $28.5, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $257.4 million, earnings will come to $25.4 million, and it would be trading on a PE ratio of 39.8x, assuming you use a discount rate of 10.0%.
• Given the current share price of $14.47, the bearish analyst price target of $20.0 is 27.7% 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.