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Key Takeaways
- The emphasis on expanding through mergers and acquisitions aims at revenue diversification and market share increase in wireline and commercial communications.
- Strategic investments in quantum computing and cybersecurity, coupled with a focus on software and services, show a move towards stable, predictable revenue and improved net margins.
- Exposure to fluctuating markets and sectors, including aerospace, automotive, and semiconductor, hints at potential revenue and growth volatility for Keysight Technologies.
Catalysts
About Keysight Technologies- Provides electronic design and test solutions to commercial communications, networking, aerospace, defense and government, automotive, energy, semiconductor, electronic, and education industries in the Americas, Europe, and the Asia Pacific.
- The demand for AI and data center network upgrades driving investments in high-speed Ethernet data rates and AI model training indicates a significant opportunity for revenue growth in wireline and commercial communications orders.
- The emphasis on expanding serviceable available market (SAM) through disciplined mergers and acquisitions (M&A) suggests potential for increased revenue diversification and market share gain.
- The strategic focus on returning capital through share repurchases highlights a commitment to boosting shareholder value that could positively influence earnings per share (EPS).
- Investments in areas like quantum computing and cybersecurity for government and defense applications suggest potential for future revenue growth in the aerospace, defense, and government sector.
- The expansion of software and services, accounting for a significant portion of total revenue, alongside efforts to increase annual recurring revenue, indicates a move towards a more stable and predictable revenue stream, potentially improving net margins.
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Keysight Technologies's revenue will grow by 6.7% annually over the next 3 years.
- Analysts assume that profit margins will shrink from 18.2% today to 0.2% in 3 years time.
- Analysts expect earnings to reach $1.2 billion (and earnings per share of $7.45) by about August 2027, up from $913.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.5 billion in earnings, and the most bearish expecting $1.1 billion.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.3x on those 2027 earnings, down from 29.0x today. This future PE is greater than the current PE for the US Electronic industry at 22.6x.
- Analysts expect the number of shares outstanding to decline by 2.73% per year for the next 3 years.
- To value all of this in today's dollars, we will use a discount rate of 7.08%, as per the Simply Wall St company report.
Risks
What could happen that would invalidate this narrative?- The prolonged U.S. budget approval process delaying funding for new projects suggests potential disruptions in revenue from aerospace, defense, and government sectors.
- Exposure to the automotive industry, where lower auto manufacturing activity and delayed investments in battery test and electric vehicle (EV) infrastructure present risks to anticipated revenue growth.
- Reliance on hyperscaler investments for growth in the data center network upgrade market could lead to volatility in orders and revenue, given the concentrated nature of such investments and supply chain constraints.
- The mixed demand environment in the semiconductor sector, with certain segments working through excess inventory, might impact revenue recovery and growth in this key market segment for Keysight.
- The potential for a gradual rather than a rapid recovery in various sectors, including telecommunications and semiconductor, implies risks to achieving high revenue growth rates or margin expansion in the near to medium term.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of $168.36 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 $185.0, and the most bearish reporting a price target of just $150.0.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $6.1 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 7.1%.
- Given the current share price of $152.59, the analyst's price target of $168.36 is 9.4% 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.
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Disclaimer
Warren A.I. is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by Warren A.I. are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that Warren A.I.'s analysis may not factor in the latest price-sensitive company announcements or qualitative material.