AI And Automotive Trends Will Drive Advanced Chip Adoption

Key Takeaways

• Landmark customer wins and accelerating IP outsourcing position Arteris for rapid revenue growth and increased account stickiness amid AI and automotive adoption tailwinds.
  
• FlexGen and Magillem Packaging proliferation, validated by industry leaders, set the stage for margin expansion and rising contract values as industry complexity grows.
  
• Customer concentration, rising costs, industry shifts, geopolitical risks, and persistent losses threaten Arteris' revenue stability and long-term path to profitability.

Catalysts

Provides semiconductor system intellectual property solutions in the United States, rest of the Americas, China, Korea, the rest of the Asia Pacific, Europe, and the Middle East.

• While analyst consensus highlights AI and automotive growth as drivers, they underestimate the pace of adoption and size of wins for Arteris, as evidenced by landmark deals like AMD, which are likely to spark further whale customer conversions and materially accelerate revenue compounding in coming years.
  
• Analysts broadly agree FlexGen can lift ASPs and margins, but they overlook the technology's rapid proliferation-validation by leading players like AMD, as well as over two dozen active flex deployments, sets the stage for a step change in average contract values and sustained margin expansion as FlexGen becomes the de facto standard.
  
• The accelerating complexity and migration towards chiplet-based SoC architectures, still in the early innings industry-wide, is poised to exponentially increase Arteris's addressable market and its IP content per chip, supporting multi-year double-digit design start growth and strong recurring royalty flow.
  
• Arteris's move to automate packaging and integration of IP blocks via Magillem Packaging positions it as a mission-critical enabler for the next wave of AI, edge, and IoT chip development, making its platform indispensable and embedding it more deeply in customer R&D flows, which should materially improve long-term account stickiness and pricing power, directly benefiting revenue stability and upward margin trends.
  
• As the semiconductor industry faces shortages of internal IP design talent and time-to-market pressures intensify, leading customers are accelerating outsourcing of foundational system IP to Arteris, creating the potential for an inflection in both deal velocities and project sizes that will drive outsized top-line growth and a rapid transition to sustained free cash flow generation.

Arteris Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Arteris compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Arteris's revenue will grow by 18.8% annually over the next 3 years.
• Even the bullish analysts are not forecasting that Arteris will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Arteris's profit margin will increase from -52.4% to the average US Software industry of 13.5% in 3 years.
• If Arteris's profit margin were to converge on the industry average, you could expect earnings to reach $14.3 million (and earnings per share of $0.28) by about August 2028, up from $-33.1 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 bullish analyst cohort, the company would need to trade at a PE ratio of 74.1x on those 2028 earnings, up from -12.0x today. This future PE is greater than the current PE for the US Software industry at 37.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.47%, as per the Simply Wall St company report.

Arteris Future Earnings Per Share Growth

Risks

• Heavy reliance on a few large semiconductor customers like AMD highlights customer concentration risk for Arteris, which could threaten future revenue stability and increase earnings volatility if major customers shift to in-house solutions or alternative suppliers.
  
• Ongoing increases in research and development spending, along with the need to continuously innovate amid expanding technical complexity in network-on-chip products, may cause operating costs to rise faster than revenues, putting pressure on long-term net margins.
  
• The rise of system-level integration and vertical integration within large semiconductor companies, as well as the availability of open-source and royalty-free alternatives to NoC technology, could reduce the overall demand for third-party NoC IP like Arteris provides, shrinking its addressable market and diminishing revenue growth.
  
• Intensifying geopolitical tensions and the trend toward technology nationalism may disrupt supply chains and limit Arteris' ability to access global markets, making its revenues more vulnerable to external shocks and regulatory barriers over time.
  
• Ongoing non-GAAP and GAAP net losses, coupled with negative free cash flow and a dependence on persistent investing in R&D and sales expansion, indicate that profitability may remain elusive in the long term, which could weigh on earnings and the company's ability to sustain its operations without additional capital.

Valuation

• The assumed bullish price target for Arteris is $16.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Arteris's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.0, and the most bearish reporting a price target of just $11.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $106.0 million, earnings will come to $14.3 million, and it would be trading on a PE ratio of 74.1x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $9.31, the bullish analyst price target of $16.0 is 41.8% 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.