AI Data Center And 6G Tailwinds Will Support A Stronger Long Term Outlook

Catalysts

About Keysight Technologies

Keysight Technologies provides electronic design, test and measurement solutions for communications, aerospace and defense, semiconductors, automotive and general electronics customers worldwide.

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

• AI data center build outs and the shift to Ethernet based AI networking, including 800G, 1.6T and early 3.2T development, are creating more complex test requirements across the full stack. This can support higher demand for Keysight's wireline portfolio and support revenue and gross margin mix through higher value solutions.
• Rising semiconductor complexity, including high bandwidth memory and silicon photonics programs at major foundries, is increasing wafer level test and characterization needs. This can expand Electronic Industrial Solutions Group revenue and support operating margin through specialized tools.
• Defense modernization across spectrum operations, space and satellite and radar, together with higher defense budgets in North America and Europe, is supporting aerospace, defense and government orders. This can support Communications Solutions Group revenue and margin resilience given the mission critical nature of these programs.
• Growing activity in 6G research, non terrestrial networks and AI at the edge is widening Keysight's wireless engagement from R&D to field deployments. This can support software and services mix around emulation and measurement and contribute to recurring revenue and earnings.
• Increasing test intensity for complex high performance PCBs, EV and high power charging systems and digital health devices is broadening Keysight's role across general electronics, automotive and energy. This can support Electronic Industrial Solutions Group growth and help maintain company level operating margin.

Assumptions

This narrative explores a more optimistic perspective on Keysight Technologies compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Keysight Technologies's revenue will grow by 13.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 17.3% today to 18.7% in 3 years time.
• The bullish analysts expect earnings to reach $1.6 billion (and earnings per share of $9.2) by about February 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 bullish analyst cohort, the company would need to trade at a PE ratio of 47.3x on those 2029 earnings, down from 52.7x today. This future PE is greater than the current PE for the US Electronic industry at 28.0x.
• The bullish analysts expect the number of shares outstanding to decline by 0.58% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.54%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• AI infrastructure spending is currently a strong theme, but it is still concentrated around hyperscalers and a growing set of neoclouds. This exposes Keysight to a relatively narrow group of customers and complex, fast moving technology standards, and any slowdown in AI data center build outs or delays in transitions to 800G, 1.6T and 3.2T could weigh on wireline test demand and limit revenue growth and earnings expansion.
• The company is leaning heavily into overlapping technology cycles such as higher speed Ethernet, silicon photonics and optical interconnects. If one of these long term bets loses out to an alternative approach or standard, Keysight could face product obsolescence, weaker pricing and lower gross margin on new hardware and software tools.
• Rising global defense budgets and modernization programs are currently supporting aerospace, defense and government orders. However, that depends on continued political and budget support in the U.S. and Europe, and any future shift in priorities, program cancellations or slower awards could lead to softer Communications Solutions Group revenue and pressure on operating margin.
• The company is pursuing several acquisitions, including Spirent, optical design and PowerArtist businesses, and is targeting more than $100m of cost synergies that are heavily weighted to late 2026. Any integration setbacks, slower synergy realization or weaker performance in the acquired units could dilute group operating margin and restrain earnings growth.
• Keysight is increasing exposure to software, services and annual recurring revenue, but this model relies on sustained customer adoption of its design and emulation platforms. If AI tools, alternative simulation software or in house solutions from large customers start to replace Keysight workflows, that could limit software mix expansion, cap gross margin benefits and reduce the stability of earnings.

Valuation

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

• The assumed bullish price target for Keysight Technologies is $340.0, which represents up to two standard deviations above the consensus price target of $287.08. 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 bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $340.0, and the most bearish reporting a price target of just $220.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $8.3 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 47.3x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $301.48, the analyst price target of $340.0 is 11.3% 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.