Soitec surges as JPMorgan upgrades stock, doubles price target on photonics boom

On Wednesday, Soitec shares experienced a significant surge of more than 11% following JPMorgan's decision to upgrade the stock to Overweight from Neutral. The financial institution also raised its price target to €200 from €98, citing the growing demand for the company's Silicon Photonics business. This development overpowers earlier concerns surrounding the company's mobile chip segment.

Craig McDowell, one of JPMorgan's analysts, explained that the previous worries about market decline and share loss in the mobile segment have been overshadowed by positive expectations for the Silicon Photonics business. The bank anticipates that this division will exceed €1 billion in revenue by fiscal year 2030, with a higher contribution margin than previously observed.

To enhance visibility on volumes, the analyst highlighted that Capacity Reservation Agreements are improving, with pricing likely to stay flexible and potentially increase in the near-to-medium term due to market tightness. Additionally, Soitec may need to extend its Singapore manufacturing facility, adding approximately 1 million extra silicon-on-insulator wafers at an estimated capital cost of €700 million over two years.

The Silicon Photonics business could achieve a run rate of around $500 million annually, or about €450 million, by fiscal year 2027.

While concerns persist about Soitec's mobile chip business, the analyst expects a more severe decline in the RF-SOI segment than what the market currently anticipates, primarily due to weak volumes and channel inventory challenges. He does not foresee Mobile returning to a revenue-generating status of more than €400 million annually within the forecast period.

Nevertheless, McDowell believes that the missing €80 million of Mobile revenue in fiscal year 29 is insignificant compared to the substantial upside potential for Silicon Photonics.

The analyst further emphasized that investors have been relying on Soitec's previous peak gross margin of 37% from fiscal year 2023, but his analysis suggests that this level might be surpassed as early as fiscal year 2028. JPMorgan projects that gross margins could reach the mid-40s by fiscal year 2029 and 2030, with operating margins exceeding 30%. These improvements are driven by Silicon Photonics' contribution margin, which surpasses 75%, significantly above the group average.

Despite the divided opinions among investors, McDowell maintains that the earnings leverage is likely being underestimated. He expects that it will become increasingly challenging for skeptics to maintain their views, given the magnitude of the upcoming consensus upgrades.