AI Data Centers And PCIe Gen 7 Advancements Will Drive Future Demand For High-Margin Solutions

Key Takeaways

• Expansion in AI data centers and new technology standards fuels demand, boosting Keysight's long-term revenue and margins.
  
• Growth in software and services, alongside acquisitions, enhances margin expansion through higher-margin recurring revenue streams.
  
• Uncertain macro conditions and challenges in key sectors could hinder Keysight's revenue growth and strain operating margins despite strategic investments.

Catalysts

Offers electronic design and test solutions worldwide.

• Keysight Technologies is poised for growth as strong customer engagements and a positive sales funnel indicate a gradual recovery in demand, likely leading to revenue growth.
  
• The expansion of AI data centers and increasing complexity in technology standards such as PCIe Gen 7 and 400 gig speeds are expected to drive long-term demand for Keysight's solutions, positively impacting revenue and margins.
  
• The development of non-terrestrial networks, 6G, and increased defense spending on technology modernization provide opportunities for growth in the communications and defense segments, likely boosting revenue and earnings.
  
• Keysight's focus on software and services, which account for approximately 40% of revenue, indicates potential for margin expansion through higher-margin recurring revenue streams.
  
• Planned acquisitions, pending regulatory approvals, could strengthen Keysight's design engineering software portfolio, contributing to revenue growth and improved operating margins.

Keysight Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Keysight Technologies's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.2% today to 20.1% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $7.4) by about March 2028, up from $611.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.6x on those 2028 earnings, down from 44.1x today. This future PE is greater than the current PE for the US Electronic industry at 21.1x.
• Analysts expect the number of shares outstanding to decline by 1.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.58%, as per the Simply Wall St company report.

Keysight Technologies Future Earnings Per Share Growth

Risks

• The macro environment is expected to remain mixed, with uncertainties stemming from potential U.S. policy actions, potentially impacting Keysight's revenue growth at the low end of their 5% to 7% long-term target. This could affect overall earnings growth and financial performance.
  
• The smartphone supply chain remains muted, and despite stability in wireless, the continued delay in recovery in the smartphone ecosystem could limit revenue growth opportunities in Keysight's Communications Solutions Group.
  
• The automotive market conditions remain challenged, with muted activity in manufacturing and EV battery development. This softness in automotive could impact Keysight's revenue and growth in its Electronic Industrial Solutions Group.
  
• There are ongoing challenges with government budgets and continuing resolutions affecting the aerospace, defense, and government sectors, which could lead to delays in orders and revenue recognition, impacting overall earnings and margins.
  
• The potential need for incremental investments and increased operating expenses, as the company navigates the recovery and invests in new opportunities, may put pressure on maintaining desired operating margins and could impact net earnings.

Valuation

• The analysts have a consensus price target of $184.855 for Keysight Technologies 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 $200.0, and the most bearish reporting a price target of just $157.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $6.1 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 31.6x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of $155.89, the analyst price target of $184.86 is 15.7% 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.