Defense Drones And Edge AI Platforms Will Drive Long Term Upside Potential

Catalysts

About Lantronix

Lantronix provides secure edge-to-cloud hardware, software and services that enable intelligent connectivity, processing and management for drones, industrial IoT and network infrastructure.

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

• Scaling adoption of AI-enabled unmanned aerial systems with 17 OEM engagements and design wins, alongside platforms like Edge AI payloads and Sightline integration, positions drones to reach 10% to 15% of company revenue by fiscal 2027, supporting multi-year top line growth and sustaining gross margins at or above mid 40 percent levels.
• Launch of EdgeFabric.ai and no-code Edge AI workflow tools for cameras, drones and industrial monitors should deepen customer stickiness, accelerate deployment cycles and create a growing mix of high-margin recurring software and services, expanding net margins as software and ARR rise toward and beyond the current mid single digit revenue contribution.
• Expansion of asset monitoring and industrial IoT offerings, including Kompress.ai with Vodafone IoT and the Tier 1 MNO generator and equipment tracking program, opens large underpenetrated infrastructure markets that can add multi-year recurring revenue streams and diversify growth, improving revenue visibility and earnings stability.
• Sustained investment in critical network infrastructure and out-of-band management, supported by healthy enterprise and industrial connectivity demand and a forthcoming new out-of-band product, should drive incremental hardware refresh and deployment cycles, supporting steady revenue growth while mix shift to premium solutions supports gross margin resilience.
• Robust defense and aerospace funding tied to secure, NDAA and TAA-compliant AI solutions, combined with adjacencies in robotics, security and surveillance, creates a multi-year demand backdrop in which Lantronix can leverage existing camera and edge compute IP to scale higher value platforms, lifting both revenue and operating leverage as cost discipline holds operating expenses roughly flat.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Lantronix's revenue will grow by 10.7% annually over the next 3 years.
• Analysts are not forecasting that Lantronix will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Lantronix's profit margin will increase from -8.7% to the average US Communications industry of 9.7% in 3 years.
• If Lantronix's profit margin were to converge on the industry average, you could expect earnings to reach $15.5 million (and earnings per share of $0.38) 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 $-15.7 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 26.5x on those 2028 earnings, up from -22.0x today. This future PE is lower than the current PE for the US Communications industry at 34.0x.
• 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 8.28%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The drone opportunity is still in the early stages, with design wins but limited shipping volumes. Any slowdown in defense funding, delays in government procurement, or loss of OEM programs could prevent drones from reaching the targeted 10 to 15 percent of company revenue, capping long term revenue growth and limiting operating leverage.
• Lantronix is leaning heavily on emerging AI SaaS platforms such as EdgeFabric.ai and Kompress.ai that are only beginning to commercialize. If customer adoption is slower than expected or competition intensifies, the mix shift toward high margin recurring software could stall, constraining future net margin expansion and earnings growth.
• The company continues to operate in a complex global trade and tariff environment for hardware centric network and IoT products. Adverse regulatory changes, supply chain disruptions, or required redesigns could compress gross margins from the current mid 40s percent level and increase operating costs, weakening profitability.
• Despite recent non GAAP profitability, Lantronix still reported a GAAP net loss in the quarter. If growth in core network infrastructure or new verticals does not outpace rising expenses or royalty and mix benefits fade, the company may struggle to sustain consistent earnings, putting pressure on valuation multiples.

Valuation

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

• The analysts have a consensus price target of $7.88 for Lantronix 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 $9.0, and the most bearish reporting a price target of just $7.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $160.6 million, earnings will come to $15.5 million, and it would be trading on a PE ratio of 26.5x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $5.75, the analyst price target of $7.88 is 27.0% 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.