Wi-Fi 7 Headwinds And Public Sector Delays Will Eventually Support A Modest Recovery

Catalysts

About Airgain

Airgain provides advanced wireless connectivity solutions that simplify and enhance performance for consumer, enterprise and automotive applications.

What are the underlying business or industry changes driving this perspective?

• Although the Wi-Fi 7 upgrade cycle with Tier 1 cable and fiber operators offers multi year unit growth, execution risk around ramp timing, price pressure on high volume SKUs and potential delays in gateway launches could cap the revenue contribution and limit gross margin expansion from this transition.
• Although rising adoption of connected utility infrastructure and grid monitoring is driving steady embedded modem demand and higher mix within enterprise, extended project qualification cycles and utility budget tightening may slow installation rates and temper the expected lift to recurring revenue and earnings.
• While the shift from basic connectivity to high bandwidth fleet digitization, including multi camera video and sensor rich vehicles, supports broader use cases for AirgainConnect, elongated Tier 1 and Tier 2 fleet sales cycles and constrained public sector funding could push out design win conversions and delay operating leverage on sales and marketing expenses.
• Although carriers and tower companies face mounting pressure to expand 5G coverage with lower cost, lower power infrastructure, which aligns with Lighthouse’s value proposition, conservative capex budgets, slow certification based deployment schedules and competitive alternatives may limit near term site volumes and mute the impact on total company revenue growth.
• While the company’s disciplined OpEx management and pivot from components to platform solutions provide a path to structurally higher gross margins and more scalable earnings, reliance on a small number of high impact programs in emerging markets and public safety creates concentration and execution risk that could constrain net margin improvement if any of these programs underperform.

Assumptions

This narrative explores a more pessimistic perspective on Airgain compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Airgain's revenue will grow by 10.1% annually over the next 3 years.
• The bearish analysts are not forecasting that Airgain will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Airgain's profit margin will increase from -10.9% to the average US Electronic industry of 8.8% in 3 years.
• If Airgain's profit margin were to converge on the industry average, you could expect earnings to reach $6.4 million (and earnings per share of $0.48) by about December 2028, up from $-5.9 million today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from -8.1x today. This future PE is lower than the current PE for the US Electronic industry at 24.7x.
• The bearish analysts expect the number of shares outstanding to grow by 3.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.65%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Carrier and government customers face elongated sales, pilot and certification cycles, and the company itself repeatedly highlights cautious optimism and lengthy engagement timelines for AirgainConnect and Lighthouse, which could delay or reduce expected deployment volumes and slow revenue and earnings growth.
• Key growth platforms such as AirgainConnect and Lighthouse are still at trial or early rollout stages with only modest revenue expected near term. If customer pilots do not convert to large scale commercial orders, the shift from a components model to a scalable systems model may stall, limiting long term revenue expansion and operating margin improvement.
• Core product lines show pockets of weakness, including declining automotive and enterprise antenna sales and ongoing channel inventory overhang in government linked projects. If these issues persist longer than expected they could offset double digit growth in Wi-Fi 7 and embedded modems and constrain overall revenue and gross margin progression.
• The company is deliberately increasing investment into growth platforms while keeping total OpEx flat. If Lighthouse and AirgainConnect ramps slip or underperform, this spend mix could fail to generate sufficient incremental gross profit and lead to renewed adjusted EBITDA and net income losses.
• Airgain ended the quarter with only 7.1 million dollars in cash and continues to post year-to-date operating losses that are being partially offset by one time employee retention credit inflows. If revenue growth underdelivers or margins compress, the company may need to raise capital on dilutive terms, pressuring earnings per share and potentially the share price.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Airgain is $5.0, which represents up to two standard deviations below the consensus price target of $6.33. This valuation is based on what can be assumed as the expectations of Airgain's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.0, and the most bearish reporting a price target of just $5.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $73.1 million, earnings will come to $6.4 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of $4.05, the analyst price target of $5.0 is 19.0% 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.