Geopolitical Tensions And Battery Oversupply Will Constrain Market Potential

Key Takeaways

• Rising geopolitical risks, industry commoditization, and reliance on subsidies threaten revenue stability and compress margins amid heightened cross-border and regulatory pressures.
  
• Innovation risks and cost-cutting in R&D could undermine competitiveness, exposing Microvast to rapid technological disruption and potential earnings declines.
  
• Innovation, production expansion, and broadening market presence position Microvast for sustained growth, improved profitability, and reduced financial risk.

Catalysts

Provides battery technologies for electric vehicles and energy storage solutions.

• Intensifying geopolitical tensions and trade disruptions, as referenced by the company's acknowledgment of ongoing global supply chain uncertainties and the strategic reliance on expansion in APAC, EMEA and the US, threaten to disrupt Microvast's growth pipeline and undermine revenue stability, particularly as cross-border regulatory risks rise.
  
• Accelerating commoditization and falling prices in the lithium-ion battery industry, combined with the company's aggressive capacity expansions and projections of high sales growth, could trigger a supply glut, leading to margin compression and limited top-line growth as Microvast competes in increasingly price-sensitive markets.
  
• The persistent risk of emerging next-generation battery technologies, such as all-solid-state batteries from larger competitors, threatens to render Microvast's current core offerings obsolete, especially if its own innovation roadmap fails to deliver technical breakthroughs or timely market adoption; this could precipitate significant revenue declines and gross margin erosion over the long term.
  
• Ongoing dependence on policy incentives and subsidies, especially in key markets like the US and EMEA, creates volatility for future revenue streams; reductions or abrupt changes in government support could sharply diminish Microvast's ability to secure contracts and maintain profitability.
  
• Microvast's improved profitability is partly driven by cost controls and reduced operating expenses, including cuts in R&D and share-based compensation; if these cost reductions hinder product innovation or talent retention as competition intensifies, this could ultimately reverse recent earnings gains and result in declining net margins in future periods.

Microvast Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Microvast Holdings compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Microvast Holdings's revenue will grow by 19.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -26.2% today to 7.9% in 3 years time.
• The bearish analysts expect earnings to reach $56.0 million (and earnings per share of $0.12) by about August 2028, up from $-108.8 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 22.6x on those 2028 earnings, up from -8.6x today. This future PE is lower than the current PE for the US Machinery industry at 23.2x.
• Analysts expect the number of shares outstanding to grow by 0.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.78%, as per the Simply Wall St company report.

Microvast Holdings Future Earnings Per Share Growth

Risks

• Microvast's record first quarter revenue growth of 43 percent year-over-year, sustained triple-digit EMEA sales expansion, and significantly improved gross margins suggest enduring strong market demand across commercial vehicles and energy storage, indicating that top-line revenue and profitability could remain robust or even improve further.
  
• The company's transition to sustained profitability with a first quarter net profit of $61.8 million, growing adjusted net profit, and positive adjusted EBITDA demonstrate sound operational execution and improved cost control, reducing downside risk to future earnings.
  
• Investments in new production capacity, particularly the Huzhou Phase 3.2 expansion adding up to 2 gigawatt-hours annually, position Microvast to meet increasing customer demand and support its ability to scale revenue and achieve higher operating leverage over the longer term.
  
• Ongoing advancements in next-generation technologies, including proprietary 3D-printing for solid-state batteries and high-efficiency bipolar stacked cell architectures, point to strong innovation capabilities that could enable Microvast to capture premium opportunities and support future gross margins.
  
• Increasing geographic diversification, with rapidly growing EMEA sales and emerging U.S. market penetration, reduces revenue concentration risk and creates a broader base for sustained revenue and profit growth over multiple years.

Valuation

• The assumed bearish price target for Microvast Holdings is $3.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Microvast Holdings'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 $5.0, and the most bearish reporting a price target of just $3.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $711.9 million, earnings will come to $56.0 million, and it would be trading on a PE ratio of 22.6x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of $2.89, the bearish analyst price target of $3.0 is 3.7% higher. The relatively low difference between the current share price and the analyst bearish 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.