Things Look Grim For Canaan Inc. (NASDAQ:CAN) After Today's Downgrade

Market forces rained on the parade of Canaan Inc. (NASDAQ:CAN) shareholders today, when the analysts downgraded their forecasts for next year. Revenue and earnings per share (EPS) forecasts were both revised downwards, with the analysts seeing grey clouds on the horizon. The stock price has risen 4.4% to US$2.86 over the past week. We'd be curious to see if the downgrade is enough to reverse investor sentiment on the business.

Following the downgrade, the consensus from four analysts covering Canaan is for revenues of CN¥3.9b in 2023, implying a painful 40% decline in sales compared to the last 12 months. Statutory earnings per share are anticipated to crater 67% to CN¥5.53 in the same period. Prior to this update, the analysts had been forecasting revenues of CN¥6.5b and earnings per share (EPS) of CN¥8.58 in 2023. It looks like analyst sentiment has declined substantially, with a pretty serious reduction to revenue estimates and a pretty serious decline to earnings per share numbers as well.

Our analysis indicates that CAN is potentially undervalued!

The consensus price target fell 6.1% to CN¥49.58, with the weaker earnings outlook clearly leading analyst valuation estimates. Fixating on a single price target can be unwise though, since the consensus target is effectively the average of analyst price targets. As a result, some investors like to look at the range of estimates to see if there are any diverging opinions on the company's valuation. The most optimistic Canaan analyst has a price target of CN¥9.08 per share, while the most pessimistic values it at CN¥4.02. Even so, with a relatively close grouping of estimates, it looks like the analysts are quite confident in their valuations, suggesting Canaan is an easy business to forecast or the underlying assumptions are obvious.

Of course, another way to look at these forecasts is to place them into context against the industry itself. These estimates imply that sales are expected to slow, with a forecast annualised revenue decline of 33% by the end of 2023. This indicates a significant reduction from annual growth of 76% over the last three years. By contrast, our data suggests that other companies (with analyst coverage) in the same industry are forecast to see their revenue grow 4.8% annually for the foreseeable future. So although its revenues are forecast to shrink, this cloud does not come with a silver lining - Canaan is expected to lag the wider industry.

The Bottom Line

The biggest issue in the new estimates is that analysts have reduced their earnings per share estimates, suggesting business headwinds lay ahead for Canaan. Regrettably, they also downgraded their revenue estimates, and the latest forecasts imply the business will grow sales slower than the wider market. Given the scope of the downgrades, it would not be a surprise to see the market become more wary of the business.

With that said, the long-term trajectory of the company's earnings is a lot more important than next year. At Simply Wall St, we have a full range of analyst estimates for Canaan going out to 2024, and you can see them free on our platform here.

Of course, seeing company management invest large sums of money in a stock can be just as useful as knowing whether analysts are downgrading their estimates. So you may also wish to search this free list of stocks that insiders are buying.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.