Expanding In Electric Vehicles And Tech Sectors Despite Margin Pressures And Market Risks

Key Takeaways

• Everspin's entry into the electric vehicle market through STT-MRAM products addresses growing demands for high-density, fast memory, potentially enhancing automotive revenue streams.
  
• Strategic agreements and advancements in TMR sensors and PERSYST product portfolio highlight Everspin's potential for revenue growth in industrial, commercial, and data center sectors.
  
• Heavy reliance on MRAM technology adoption and new product success, alongside risks from currency exchange rates and Rad-Hard investments, could challenge revenue predictability.

Catalysts

Engages in the manufacture and sale of magnetoresistive random access memory (MRAM) products in the United States, Japan, Hong Kong, Germany, Singapore, China, Canada, and internationally.

• Introduction of STT-MRAM products expected to cater to the needs of increasing vehicle electrification, addressing high density and faster memory requirements, which standard technologies fall short of fulfilling. This positions Everspin to tap into the growing electric vehicle market, likely boosting revenue streams significantly through heightened demand in the automotive sector.
  
• A strategic agreement with a leading provider of sensor devices for foundry services regarding the latest generation TMR sensor device represents another revenue-generating channel. With Everspin's deep-seated expertise and IP in TMR sensors, this agreement can enhance product supply and quality in industrial and commercial applications, thus potentially increasing revenue from the industrial and commercial sectors.
  
• The continuing advancements and customer interest in the company’s PERSYST product portfolio, specifically the 1-gigabit STT-MRAM solution chosen by IBM for data center applications, underline Everspin’s capacity to create sustaining revenue growth from the data center sector. The sustained growth in orders from a prominent client like IBM signifies long-term revenue potential from high-density STT-MRAM products.
  
• Recovery signs and an expected modest ramp in Toggle Solutions worldwide indicate a prospective resurgence in demand for Toggle MRAM solutions. This recovery is anticipated following a period of inventory consumption by customers and slow recovery impeded by unfavorable currency exchange rates, potentially leading to reviving revenue streams in varied markets.
  
• The achievement in securing contracts for strategic radiation-hardened FPGA technology development and demonstration underlines Everspin's leveraging of its advanced MRAM technology in niche but high-value sectors like defense and aerospace. This entry not only opens up new revenue avenues but also demonstrates Everspin's technological edge and diversification potential, which could significantly enhance earnings from specialized sectors.

Assumptions

• Analysts are assuming Everspin Technologies's revenue will grow by 1.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 2.9% today to 2.1% in 3 years time.
• Analysts expect earnings to reach $1.3 million (and earnings per share of $-0.1) by about October 2027, down from $1.7 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 217.1x on those 2027 earnings, up from 85.5x today. This future PE is greater than the current PE for the US Semiconductor industry at 31.0x.
• Analysts expect the number of shares outstanding to grow by 4.6% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.05%, as per the Simply Wall St company report.

Risks

• The dependency on inventory consumption at customers for revenue forecasts introduces risks tied to customer demand variability, impacting future revenue predictability.
  
• Exposure to unfavorable currency exchange rates in the Asia Pacific markets has already been identified as a cause for weakness in Toggle MRAM product sales, affecting both revenue and net margins.
  
• The company’s success heavily relies on the broad adoption of MRAM technology and its ability to execute on bringing new products to market. Failure in either adoption rates or product development could adversely affect revenues and earnings growth.
  
• Engaging in Rad-Hard programs and strategic agreements requires substantial R&D and operational investments. Should these not yield the expected return in terms of revenue from design wins or manufacturing output, there could be a negative impact on net margins.
  
• The optimism regarding the second half of 2024 being stronger, based on anticipated design wins and new product revenue streams, poses a risk if these expectations do not materialize, potentially leading to shortfalls in revenue and earnings.

Valuation

• The analysts have a consensus price target of $9.0 for Everspin Technologies 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 $10.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $60.6 million, earnings will come to $1.3 million, and it would be trading on a PE ratio of 217.1x, assuming you use a discount rate of 8.0%.
• Given the current share price of $6.69, the analyst's price target of $9.0 is 25.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.