Excessive Customer Reliance And Global Trade Barriers Will Hurt Valuations

Key Takeaways

• Heavy dependence on a few customers and rapidly advancing alternatives threaten Knowles' revenue stability and diminish its market opportunities.
  
• Commoditization, regulatory pressures, and geopolitical instability are expected to weigh on profitability, cost control, and competitive positioning.
  
• Strong growth in MedTech and Specialty Audio, expanding product lines, solid operational execution, and a resilient financial position underpin potential for sustained profitability and strategic flexibility.

Catalysts

Offers capacitors, radio frequency (RF) and microwave filters, balanced armature speakers, and medtech microphones in Asia, the United States, Europe, rest of Americas, and internationally.

• Despite recent revenue growth and margin improvements, Knowles' heavy reliance on a limited number of customers in end markets like medtech and industrial exposes the company to significant revenue concentration risk, which could sharply erode top-line growth if a major customer reduces orders or shifts to an integrated solution.
  
• The accelerating commoditization of electronic components, fueled by intense global competition and price transparency, threatens to impose sustained pressure on average selling prices and gross margins, resulting in a long-term drag on both earnings growth and profitability.
  
• Growing geopolitical tensions and the proliferation of global trade restrictions-especially US-China tariffs and export controls-present ongoing risks to Knowles' supply chain resilience and market access, raising the likelihood of periodic disruptions that could constrain long-term revenue expansion.
  
• Rising environmental regulations and ESG-driven compliance requirements are expected to increase operational complexity and cost structures, potentially eroding net margins and reducing price competitiveness for Knowles' specialty audio and sensing products over the long run.
  
• Ongoing vertical integration among large OEMs and rapid advances in alternative sensing and microphone technologies increase the risk of product obsolescence and shrinking addressable markets for Knowles, threatening both future revenue streams and pricing power in their core business lines.

Knowles Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Knowles compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Knowles's revenue will grow by 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.8% today to 24.8% in 3 years time.
• The bearish analysts expect earnings to reach $150.9 million (and earnings per share of $1.54) by about July 2028, up from $27.0 million today. The analysts are largely in agreement about this estimate.
• 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 11.7x on those 2028 earnings, down from 66.3x today. This future PE is lower than the current PE for the US Electronic industry at 23.8x.
• Analysts expect the number of shares outstanding to decline by 2.83% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

Knowles Future Earnings Per Share Growth

Risks

• Knowles' core MedTech and Specialty Audio businesses are demonstrating resilient and accelerating growth, supported by robust design wins, strong order activity, and increasing demand for essential hearing health products, which could drive revenue and earnings higher despite broader market concerns.
  
• Expansion initiatives such as the specialty film product line and newly introduced inductor products are poised to expand Knowles' total addressable market and support organic growth rates at or above the historical range of 4 to 6 percent, with positive impacts expected for both revenue and long-term earnings.
  
• The company's operational execution, as seen in improving capacity utilization, sequential gross margin gains, and strong cash flow generation, signals healthier profitability, reducing the likelihood of margin contraction and potentially improving net margins over time.
  
• Knowles maintains a strong balance sheet with low leverage, significant liquidity, and robust cash generation, giving the company the flexibility to fund share repurchases and pursue synergistic acquisitions, all of which can support higher earnings per share and bolster shareholder value.
  
• Secular growth drivers in end markets like MedTech, defense, and industrial, alongside broad-based demand across customers and regions, provide diversification and insulation from economic shocks, which could keep revenue and profit trajectories stable or improving in the coming years.

Valuation

• The assumed bearish price target for Knowles is $18.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Knowles'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 $25.0, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $608.7 million, earnings will come to $150.9 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $20.84, the bearish analyst price target of $18.0 is 15.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.