Semiconductor IP And FlexGen Systems Will Expand AI Automotive Markets

Key Takeaways

• Growing demand for AI and automotive solutions, alongside strategic microcontroller expansion, is set to drive Arteris' revenue and earnings growth.
  
• Innovation in product offerings, such as FlexGen smart NoC and chiplet involvement, promises higher margins and improved project revenues.
  
• Persistent net losses and cash flow issues, reliance on variable royalties, and market expansion risks highlight Arteris's financial vulnerabilities and potential challenges in revenue growth.

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.

• Arteris is experiencing increased demand for its semiconductor system IP products, particularly driven by AI-driven enterprise computing and automotive SoCs, which is expected to boost future revenue growth.
  
• The company's strategic expansion into the microcontroller space, including new customer wins like Infineon, could accelerate Arteris' royalty stream and positively impact its earnings.
  
• The introduction of FlexGen smart NoC IP, with potential productivity improvements and power savings, presents opportunities for higher ASPs and improved operating margins.
  
• Arteris' engagement in the chiplet trend, allowing for multiple die designs and involving multiple stakeholders, could increase its average revenue per project and enhance future earnings.
  
• Efficient cost management with the expectation of profitable revenue growth is setting Arteris on a path to becoming free cash flow positive, improving overall financial health.

Arteris Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arteris's revenue will grow by 19.7% annually over the next 3 years.
• 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 -58.3% to the average US Software industry of 11.8% in 3 years.
• If Arteris's profit margin were to converge on the industry average, you could expect earnings to reach $11.7 million (and earnings per share of $0.24) by about April 2028, up from $-33.6 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 65.1x on those 2028 earnings, up from -7.2x today. This future PE is greater than the current PE for the US Software industry at 29.6x.
• Analysts expect the number of shares outstanding to grow by 6.42% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Arteris Future Earnings Per Share Growth

Risks

• Ongoing net losses and negative cash flow in recent quarters highlight financial risks, as Arteris is yet to achieve profitability, which could impact future earnings if losses persist.
  
• Heavy reliance on variable royalties, especially from key customers like Mobileye, poses a revenue risk given potential fluctuations in demand or further inventory corrections in the automotive sector.
  
• High exposure to delayed customer payments and working capital timing changes may affect cash flow stability and indicate potential liquidity challenges.
  
• The rapid expansion into new markets and customer segments, such as microcontrollers, may introduce execution risks that could challenge revenue growth and operating margins if not managed prudently.
  
• Increasing competitive pressures and multiple standards in the chiplet interconnect market may result in higher costs and impact net margins if Arteris cannot effectively establish itself as a dominant provider.

Valuation

• The analysts have a consensus price target of $12.5 for Arteris 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 $16.0, 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 2028, revenues will be $99.1 million, earnings will come to $11.7 million, and it would be trading on a PE ratio of 65.1x, assuming you use a discount rate of 7.6%.
• Given the current share price of $5.94, the analyst price target of $12.5 is 52.5% 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.