Expanding Global Competition Will Challenge Margins but Set Stage for Upside Potential Ahead

Catalysts

About Daktronics Daktronics designs and manufactures large-scale digital display systems for sports, commercial, transportation, and educational markets worldwide.

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

• Although Daktronics has reported robust order growth and a strong backlog driven by live events and high school markets, the reliance on large, long-cycle projects may delay revenue recognition. This could result in earnings volatility over the next several quarters.
• While the company’s digital and business transformation efforts are improving operational efficiencies, the continued investment in IT and product development is expected to elevate operating expenses in the near term. This may place temporary pressure on net margins.
• New product introductions and expanding service offerings are positioning the company for future growth. However, increased global competition in major sports and commercial segments could impact pricing power and future revenue growth rates.
• International orders are rising, particularly in government and advertising sectors. At the same time, a decline in orders compared to prior high quarters and ongoing variability in transportation demand may lead to uneven revenue contributions and challenge sustained earnings growth.
• Domestic manufacturing may benefit from regulatory changes such as the Buy America Act. Ongoing tariff uncertainties and evolving global trade conditions introduce risk to both gross margin stability and procurement costs in future periods.

Assumptions

This narrative explores a more pessimistic perspective on Daktronics 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 Daktronics's revenue will grow by 11.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.5% today to 12.5% in 3 years time.
• The bearish analysts expect earnings to reach $129.1 million (and earnings per share of $2.59) by about December 2028, up from $11.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $142.0 million.
• 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 12.7x on those 2028 earnings, down from 79.3x today. This future PE is lower than the current PE for the US Electronic industry at 23.9x.
• The bearish analysts expect the number of shares outstanding to grow by 3.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.41%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Ongoing tariff uncertainties and rising tariff expenses could significantly increase Daktronics' costs, making it challenging to maintain gross margin stability and potentially leading to lower profitability in upcoming quarters.
• The company’s order backlog contains a high proportion of large, long-cycle projects, especially in the Live Events segment. This may delay revenue recognition and result in volatile or unpredictable revenue streams and earnings across fiscal periods.
• Continued high investment in information technology and product development as part of the company’s transformation and innovation initiatives may elevate operating expenses in the near term. This could put downward pressure on net margins if revenue growth does not accelerate sufficiently to offset these expenses.
• Increasing competition across major markets, particularly in live events, sports, and commercial advertising, could erode Daktronics’ pricing power, disrupt its market share, and potentially slow revenue growth over the long term.
• The company’s international orders and exposure to global markets may introduce greater variability and risk related to foreign exchange, regulation, and demand. This could lead to uneven earnings contributions and risk to sustained long-term growth.

Valuation

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

• The assumed bearish price target for Daktronics is $24.0, which represents up to two standard deviations below the consensus price target of $27.5. This valuation is based on what can be assumed as the expectations of Daktronics'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 $31.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $129.1 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $18.45, the analyst price target of $24.0 is 23.1% 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.