Technoprobe And FormFactor Partnerships Will Drive Future Success In AI Semiconductor Testing

Key Takeaways

• Strong demand for AI-driven semiconductor testers boosts revenue and future financial outlook, with strategic partnerships enhancing market share.
  
• Diversified supply chain and capital efficiency efforts improve operational efficiency and shareholder returns, supporting earnings growth.
  
• Geopolitical risks, weak non-AI sector demand, and competitive pressures could hinder Advantest's revenue diversification, while exchange rate fluctuations pose additional earnings volatility.

Catalysts

Manufactures and sells semiconductors, component test system products, and mechatronics related products in Japan, the Americas, Europe, and Asia.

• Advantest has experienced robust tester demand primarily from AI-related high-performance semiconductors for SoC, driving strong revenues and the upward revision of their earnings forecast for FY '24. This is likely to positively impact future revenue growth.
  
• The company is enhancing its supply chain through long-term agreements and diversification, improving their ability to meet unexpected demand surges. This is likely to improve operational efficiency and potentially widen net margins.
  
• Advantest anticipates sustained demand for AI-related semiconductor testers due to increasing semiconductor complexity, which could maintain or increase revenue streams from this high-demand segment.
  
• Strategic partnerships with Technoprobe and FormFactor aim to provide higher performance test solutions in response to increased test complexity, potentially capturing more market share and enhancing revenue.
  
• The continuation of strong cash flow and a completed share repurchase program indicate a focus on capital efficiency and shareholder returns, which may support earnings growth through improved EPS.

Advantest Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Advantest's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.0% today to 23.9% in 3 years time.
• Analysts expect earnings to reach ¥203.5 billion (and earnings per share of ¥294.38) by about April 2028, up from ¥136.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ¥291.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.3x on those 2028 earnings, up from 29.2x today. This future PE is greater than the current PE for the JP Semiconductor industry at 11.5x.
• Analysts expect the number of shares outstanding to decline by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.89%, as per the Simply Wall St company report.

Advantest Future Earnings Per Share Growth

Risks

• Geopolitical risks, particularly U.S.-China tensions, could disrupt Advantest's global operations and sales, affecting revenue stability and overall earnings.
  
• Although semiconductor demand is currently driven by AI applications, the demand for testers for non-AI sectors like automotive and industrial equipment remains weak, potentially impacting Advantest's revenue diversification.
  
• Advantest faces potential headwinds from improvements in semiconductor yields, which might result in reduced test equipment demand and thus lower future revenues.
  
• Increasing competition in the custom ASIC market could pressure Advantest's market share and pricing power, impacting revenue and net margins.
  
• Exchange rate fluctuations, due to JPY depreciation, presently support financial performance, but adverse movements could negatively impact profit margins and overall earnings.

Valuation

• The analysts have a consensus price target of ¥10347.353 for Advantest 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 ¥14000.0, and the most bearish reporting a price target of just ¥6000.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥852.7 billion, earnings will come to ¥203.5 billion, and it would be trading on a PE ratio of 46.3x, assuming you use a discount rate of 7.9%.
• Given the current share price of ¥5423.0, the analyst price target of ¥10347.35 is 47.6% 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.