AI And Automotive Expansion Will Drive Future Opportunities

Key Takeaways

• Strategic focus on automotive and industrial markets, AI applications, and portfolio expansion could drive revenue growth and margin improvements.
  
• Internal manufacturing optimization and Fortemedia acquisition may enhance gross margins and boost product offerings in key markets.
  
• Challenging demand and financial risks in key markets are impacting Diodes' revenue growth, profit margins, and overall profitability.

Catalysts

Manufactures and supplies application-specific standard products in the broad discrete, logic, analog, and mixed-signal semiconductor markets worldwide.

• Diodes is focusing on expanding growth in the automotive and industrial markets, which remain above their target revenue mix and have potential for significant content expansion, impacting future revenue and margin improvements.
  
• The new opportunities in AI-related applications, particularly in the computing market, are driving content expansion per unit, which is expected to increase revenue as the adoption of AI servers with higher addressable content grows.
  
• The continued internal qualification and manufacturing of more products in Diodes' facilities aim to minimize underloading costs, potentially enhancing gross margins and earnings over time.
  
• Diodes has introduced 755 new part numbers in 2024, including automotive-specific products, suggesting future revenue growth potential and product mix improvement, which can contribute to higher gross margins.
  
• Diodes' acquisition of Fortemedia to enhance voice processing technology offerings, especially in automotive and compute markets, is expected to expand the product portfolio, this could lead to increased revenue streams and improved net margins as market adoption increases.

Diodes Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Diodes's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $167.2 million (and earnings per share of $4.73) by about March 2028, up from $44.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.3x on those 2028 earnings, down from 49.3x today. This future PE is lower than the current PE for the US Semiconductor industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 0.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.63%, as per the Simply Wall St company report.

Diodes Future Earnings Per Share Growth

Risks

• The global demand environment remains challenging, particularly in Europe and North America, which could negatively impact Diodes' revenue growth projections.
  
• Diodes is experiencing ongoing inventory rebalancing and weaker demand in major markets such as automotive and industrial, which may affect revenue and profit margins.
  
• The company's gross profit margin has decreased from prior years, suggesting that achieving previous profitability levels may be challenging, impacting net margins and earnings.
  
• Diodes has seen a significant decrease in full-year GAAP net income compared to 2023, which may strain future earnings if not reversed.
  
• Currency losses, unrealized investment losses, and interest expenses highlight financial risks that could impact overall profitability and net income.

Valuation

• The analysts have a consensus price target of $63.333 for Diodes 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 $72.0, and the most bearish reporting a price target of just $53.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $167.2 million, and it would be trading on a PE ratio of 22.3x, assuming you use a discount rate of 8.6%.
• Given the current share price of $46.83, the analyst price target of $63.33 is 26.1% 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.