Edge AI And Drone Adoption Will Drive Strong Long-Term Upside Potential

Catalysts

About Lantronix

Lantronix provides secure hardware, software and edge-to-cloud solutions that power AI-enabled connectivity across drones, industrial IoT, networking and asset monitoring applications.

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

• Rapid adoption of AI-enabled unmanned systems and visual intelligence is driving expanding design wins with 17 drone OEMs and next-generation payload platforms. This is positioning drones to reach 10 to 15 percent of company revenue by fiscal 2027 and is described as materially accelerating total revenue growth and operating leverage.
• The launch of EdgeFabric.ai and broader Edge AI orchestration for smart cameras, robotics and industrial monitoring is simplifying deployment for customers. This lays the groundwork for a higher software mix and recurring license streams that are expected to support sustained gross margin expansion and earnings growth.
• Scaling asset monitoring and compressor management via Kompress.ai with Vodafone IoT and the Tier 1 MNO generator program is creating a growing base of subscription ARR tied to critical infrastructure. This increases revenue visibility, smooths cash flow and is intended to support net margin improvement over time.
• Robust defense and government funding trends for secure, NDAA compliant connectivity and video processing solutions are reinforcing Lantronix's role in high value aerospace and defense programs. This supports premium pricing, structurally higher gross margins and potentially more resilient earnings through economic cycles.
• Ongoing demand for out-of-band management, switches and industrial connectivity as networks become more distributed is driving steady growth in the core infrastructure franchise. Combined with a leaner cost structure, this is cited as supporting sustained mid 40 percent gross margins and expanding non GAAP EPS even on moderate top line growth.

Assumptions

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

• The bullish analysts are assuming Lantronix's revenue will grow by 12.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -8.7% today to 9.3% in 3 years time.
• The bullish analysts expect earnings to reach $15.6 million (and earnings per share of $0.39) by about December 2028, up from $-10.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $-14.7 million.
• 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 30.1x on those 2028 earnings, up from -22.6x today. This future PE is lower than the current PE for the US Communications industry at 32.9x.
• The bullish analysts expect the number of shares outstanding to grow by 1.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.25%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long-term growth thesis depends heavily on drones, asset monitoring and Edge AI software maturing from early stage programs into scaled deployments, but management repeatedly emphasizes that these opportunities are still in the early days. Any slowdown in adoption cycles or customer program ramp ups could leave overall revenue growth closer to low single digits rather than the bullish double digit assumptions, which would pressure earnings growth.
• Lantronix is leaning into high margin recurring software and services such as Kompress.ai and industrial asset monitoring. These ARR streams currently make up only mid single digit percentages of revenue and are expected to build gradually over 12 to 24 months, so if customers are slower to adopt subscription models than anticipated the company may struggle to structurally lift gross margins and net margins.
• A significant share of the growth narrative is tied to defense and government funded drone and video intelligence programs that benefit from record funding and supportive regulation. Any future budget cuts, procurement delays or regulatory shifts around NDAA and TAA compliant systems could dampen demand in this vertical and reduce both revenue and margin mix.
• The strategy assumes continued strength in the core network infrastructure and out of band management franchise to provide a stable base while new verticals scale. This legacy hardware centric business faces long term competitive and pricing pressures that could erode average selling prices, compress gross margin percentages and limit operating leverage.
• Although Lantronix currently enjoys improving gross margins and a net cash position, the business has only recently swung to modest non GAAP profitability while still posting GAAP net losses. If cost controls, product mix or royalty benefits reverse in a weaker macro or trade environment, the company could revert to higher net losses and lower earnings per share than the optimistic scenario assumes.

Valuation

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

• The assumed bullish price target for Lantronix is $9.0, which represents up to two standard deviations above the consensus price target of $7.38. This valuation is based on what can be assumed as the expectations of Lantronix'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 $9.0, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $167.5 million, earnings will come to $15.6 million, and it would be trading on a PE ratio of 30.1x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $5.91, the analyst price target of $9.0 is 34.3% 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.