AI Data And Cold Storage Demand Will Drive Powerful Long Term Upside

Catalysts

About Quantum

Quantum provides intelligent data platforms that unify object, tape and file storage to power large scale archiving, protection and AI driven workloads.

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

• Rapid growth in unstructured data for AI, media, research and government archives is favoring Quantum's ActiveScale and Scalar i7 RAPTOR platforms, supporting sustained top line expansion and higher product mix driven revenue.
• Industry demand for cyber resilient, power efficient cold storage at hyperscale is aligning with Quantum's differentiated object plus tape architecture, which can lift product gross margins as scale reduces manufacturing and supply chain friction.
• Customer demand to turn cold archives into query ready datasets for AI and analytics directly benefits Quantum's new ActiveScale capabilities, creating higher value use cases that should support premium pricing and margin accretive software and services revenue.
• The shift toward regionalized AI and HPC infrastructure anchored in secure, durable data fabrics underpins Quantum's partnership with Entanglement, positioning the company to capture multi year system build outs and recurring support that can accelerate earnings growth.
• Global cloud and service provider expansion, combined with Quantum's strengthened go to market execution and expanded distribution in EMEA and APAC, should convert the elevated product backlog into more predictable revenue and operating leverage that improves net margins.

Assumptions

This narrative explores a more optimistic perspective on Quantum 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 Quantum's revenue will grow by 3.8% annually over the next 3 years.
• The bullish analysts are not forecasting that Quantum will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Quantum's profit margin will increase from -57.1% to the average US Tech industry of 6.2% in 3 years.
• If Quantum's profit margin were to converge on the industry average, you could expect earnings to reach $17.8 million (and earnings per share of $1.06) by about December 2028, up from $-146.7 million today.
• 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 16.6x on those 2028 earnings, up from -0.8x today. This future PE is lower than the current PE for the US Tech industry at 24.3x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.55%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Despite a strong product backlog, revenue is currently in a declining trend, falling from 71.8 million in the prior year quarter to 62.7 million this quarter. If supply chain constraints, manufacturing bottlenecks and execution issues persist over multiple quarters, the company may struggle to convert backlog into sustainable top line growth, which would pressure revenue and earnings over the long term.
• Quantum remains structurally loss making with a GAAP net loss of 46.5 million and continues to bear approximately 6 million of quarterly interest expense. If restructuring savings and incremental gross margin improvements fail to offset this high fixed cost and interest burden as secular storage pricing pressure continues, net margins and earnings could remain deeply negative even as adjusted EBITDA turns modestly positive.
• The strategy to become debt free depends heavily on successful execution of the Dialectic debt exchange and ongoing access to standby equity. Yet this introduces shareholder dilution risk from convertible notes and warrants and exposes results to mark to market volatility on a 25 million warrant liability. If equity markets weaken or shareholder approval is not secured, liquidity could tighten and increase insolvency risk, negatively impacting net income and cash flow based valuation multiples.
• Management highlights product differentiation in tape and object storage for AI and cold data, but the enterprise storage market is highly competitive and rapidly evolving with large incumbents and cloud hyperscalers. If Quantum cannot keep pace with innovation or if large reference wins such as the Library of Congress and the Entanglement partnership do not translate into repeatable, scalable deployments, product pricing power could erode and limit future gross margin expansion and earnings growth.
• The company acknowledges an overly complex product portfolio with too many SKUs, aging components like DDR4 and incomplete transitions in manufacturing partners such as Avnet. If platform rationalization and supply chain optimization take longer than the two to three quarters envisioned, rising component costs and inconsistent availability may continue to compress product gross margin, which would constrain the path to improved operating leverage, net margins and long term earnings.

Valuation

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

• The assumed bullish price target for Quantum is $13.0, which represents up to two standard deviations above the consensus price target of $11.0. This valuation is based on what can be assumed as the expectations of Quantum'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 $13.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $287.3 million, earnings will come to $17.8 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 10.6%.
  
• Given the current share price of $9.03, the analyst price target of $13.0 is 30.5% 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.