Government Contracts And Calculated Partnerships Fuel Revenue Surge And Margin Expansion

Key Takeaways

• Strategic government contracts, including the Strategic Radiation Hardened FPGA, are anticipated to boost future earnings significantly and improve net margins.
  
• Partnerships with entities like Intel Foundry and expansion into new markets through eFPGA Hard IP business diversification are expected to drive robust revenue growth.
  
• Heavy reliance on government contracts and investments in unproven technologies pose risks to financial stability, affecting revenue predictability and profitability.

Catalysts

Operates as a fabless semiconductor company in the United States.

• The ongoing development and expected increase in revenue from government contracts, such as the Strategic Radiation Hardened FPGA contract, are set to significantly impact future earnings, particularly as these contracts progress into later, more lucrative phases. This will likely enhance both revenue and net margins due to the specific and high-value nature of these government contracts.
  
• QuickLogic's expansion of eFPGA Hard IP business into new customer bases and market sectors, supported by its diversification across multiple fabrication nodes, promises robust revenue growth driven by broader market acceptance and application of its technology, directly influencing future revenue.
  
• The company's anticipation of major revenue from storefront and chiplet opportunities beginning in late 2025 identifies a clear path for exponential revenue growth and margin expansion as these higher-value, longer-term contracts come to fruition.
  
• QuickLogic's partnership with Intel Foundry's Accelerator IP and U.S. Military, Aerospace, and Government Alliances positions it at a competitive advantage for securing new design wins. This collaboration will likely result in increased demand for QuickLogic's offerings, thereby boosting future revenues through access to new and expansive markets.
  
• The development of proprietary and open-source software tools to create customer-specific eFPGA Hard IP more efficiently gives QuickLogic a competitive edge in speed to market and cost efficiency. This capability is anticipated to accelerate revenue growth from a wider array of customers while enhancing net margins through reduced development costs and shorter development cycles.

Assumptions

• Analysts are assuming QuickLogic's revenue will grow by 18.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.4% today to 23.7% in 3 years time.
• Analysts expect earnings to reach $9.6 million (and earnings per share of $0.37) by about October 2027, up from $1.8 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 43.1x on those 2027 earnings, down from 62.6x 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 21.98% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.52%, as per the Simply Wall St company report.

Risks

• Scheduling pushouts have led to lowered full-year growth projections, indicating potential volatility in customer demand that could affect future revenue streams.
  
• High dependence on government contracts, such as the Strategic Radiation Hardened FPGA contract, poses risks due to the uncertainty of government funding and timelines, impacting revenue predictability.
  
• The delay in revenue recognition from certain key contracts, like the November 2022 tapeout customer and other IP deals, hints at potential challenges in execution or customer delays that could impact short-term revenue and cash flow.
  
• The significant cash usage attributed to contract timing issues could threaten liquidity and financial stability if not properly managed, impacting net margins.
  
• Investments in developing eFPGA Hard IP for new strategic fabrication processes, such as Intel 18A, without current contracts, carry execution and market acceptance risks that could affect profitability if these initiatives do not materialize as planned.

Valuation

• The analysts have a consensus price target of $12.5 for QuickLogic based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $40.7 million, earnings will come to $9.6 million, and it would be trading on a PE ratio of 43.1x, assuming you use a discount rate of 8.5%.
• Given the current share price of $7.76, the analyst's price target of $12.5 is 37.9% 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.