AI Test Demand And Defense Modernization Will Eventually Restrain This Overstretched Outlook

Catalysts

About Keysight Technologies

Keysight Technologies provides test, measurement and software solutions that help customers design, validate and manufacture advanced electronic and communications systems.

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

• AI related test demand in data centers is concentrating around a small set of hyperscalers and chipmakers. Any slowdown in their AI infrastructure buildouts or a shift to in house tools could reduce wireline orders and put pressure on Keysight's revenue growth trajectory from this area.
• The rapid shift to higher speed Ethernet based AI networking, including 800 gig, 1.6 tera and early work on 3.2 tera, may compress the useful life of current product generations and force heavier R&D and capital spending just to keep pace. This could weigh on operating margins and earnings.
• The rising importance of optical interconnects, co packaged optics and silicon photonics brings more specialized competitors and customer attempts to standardize solutions. If Keysight loses share in these newer architectures, it could limit growth in high margin measurement products and dilute overall gross margin.
• System level validation and AI workload emulation tools could face longer customer qualification cycles and budget scrutiny as AI clusters scale. If customers delay adoption or consolidate on alternative platforms, that would affect software mix, recurring revenue and net income growth.
• Defense modernization and higher global defense budgets may face political, regulatory or fiscal pushback over time. If multi year programs are reprioritized or stretched, Keysight's aerospace, defense and government orders could slow, reducing segment revenue and limiting operating margin contribution.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on Keysight Technologies compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Keysight Technologies's revenue will grow by 9.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 17.3% today to 20.5% in 3 years time.
• The bearish analysts expect earnings to reach $1.5 billion (and earnings per share of $9.32) by about April 2029, up from $981.0 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 33.3x on those 2029 earnings, down from 57.7x today. This future PE is greater than the current PE for the US Electronic industry at 31.4x.
• The bearish analysts expect the number of shares outstanding to decline by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.51%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• AI related demand is already a meaningful part of Keysight's business, with management estimating AI exposure at about 10% of company revenue in late 2025 and AI orders growing well above the 30% company average order growth in Q1 2026. If this AI test and measurement cycle remains firm or broadens further across hyperscalers, neoclouds and chipmakers, it could support revenue, gross margin and earnings rather than pressure them.
• The company is seeing concurrent technology waves in wireline, including 800 gig, 1.6 tera and early 3.2 tera Ethernet, as well as growth in optical interconnects and silicon photonics. If these faster standards keep moving ahead without materially shortening product life cycles, Keysight could keep selling higher performance systems at attractive pricing, which would be supportive for revenue and net income margins.
• Aerospace, defense and government activity is currently strong, with record Q1 orders and broad growth across regions, and management pointing to rising defense budgets and structural demand for threat emulation, space, satellite and PNT testing. If this elevated spend is sustained rather than curtailed, it could provide a resilient earnings and operating margin base that offsets weakness elsewhere.
• Electronic Industrial Solutions is reporting record revenue and double digit growth across general electronics, semiconductors and automotive and energy. If AI related PCB complexity, high bandwidth memory and silicon photonics projects continue to require intensive test and characterization, that could underpin long term revenue growth and support high 20% segment operating margins.
• Keysight is steadily increasing the role of software and services, which were approximately 40% of revenue in Q1 2026 with software around the high 20% range, and management is targeting acquisition synergies of more than US$100m and a higher mix of recurring revenue. If this shift to a larger software and annual recurring base continues, it could support gross margin expansion and more stable earnings.

Valuation

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

• The assumed bearish price target for Keysight Technologies is $236.87, which represents up to two standard deviations below the consensus price target of $315.15. This valuation is based on what can be assumed as the expectations of Keysight Technologies'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 $384.0, and the most bearish reporting a price target of just $220.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $7.5 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 33.3x, assuming you use a discount rate of 8.5%.
• Given the current share price of $329.96, the analyst price target of $236.87 is 39.3% lower. Despite analysts expecting the underlying business 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.