Why I'm Bullish On Lantronix's 2024 Outlook

Introduction

Lantronix (NASDAQ:LTRX) stands ready to capitalize on the conventional enterprise solutions market and the surging industrial IoT sphere. And they've made quite an impression. Just look at their recent FQ4 2023 numbers with a revenue of $34.9M, which beats the forecast by $0.47M and subsequently ignited the stock to rise over +20% to its highest level since May. Breaking this down, with two brokerage firms, Canaccord and Roth raising their price targets on the stock, combined with three other Street analysts with an average "Strong Buy" rating and 78% upside price projection, it's evident there's a lot to dissect regarding where Lantronix is headed.

My take?

Even when considering some fiscal challenges and leadership ambiguities, I believe their strategic spot, diversification potential, and collaborations with top-tier names like Togg and Gridspertise make a strong case for a bullish outlook.

Bridging Enterprise and IoT

Nestled in Irvine, California, Lantronix has made a name by providing technologies for everything from video surveillance to edge computing, finding itself at the intersection of traditional enterprise solutions and the global industrial IoT market which is expected to be worth $1,562.35 billion by 2032.

The good news first, with the ink still fresh from their FQ4 2023 results, Lantronix posted a 6% revenue uptick, clocking in at $34.9 million for the fourth quarter of 2023.

A portion of that growth—$3.4 million to be precise—came from a significant sale related to in-flight infotainment systems. I may be jumping the gun here (more on "Risks" and Headwinds" below), but investors shouldn't quite get their hopes up on seeing that kind of sale again in the next quarter. According to CEO/CFO Jeremy Whitaker:

We don't expect this customer to contribute at a similar level in the upcoming quarter.

Lantronix and Togg: Pioneering Turkey's EV Surge

Not to be overlooked, Togg - presently, LTRX's main EV client - has also been consistently contributing to the firm's financial health. It suggests that Lantronix is not a one-trick pony but is diversifying its revenue streams effectively.

If all goes well, I believe that Togg represents a very big opportunity for the company, assuming all goes well. With current production forecasts indicating that they would deliver approximately $5 million in FQ2 2024, Whitaker sounded pretty confident that they would be able to double that amount in Q3 and deliver the balance in FQ4.

Togg, by the way, is Turkey's first electric vehicle (EV) in a market that has experienced a remarkable 597% surge in sales from January to August 2023, with the homegrown brand leading the charge.

Despite entering the market only four months ago, Togg's domestically produced T10X model has swiftly become a top-seller, with the company aiming to deliver 20,000 units by the end of 2023. This growth comes within a backdrop of economic challenges, with the country grappling with high inflation rates and currency depreciation, leading consumers to view vehicles as a safeguard against financial instability, which I believe is good news for Lantronix.

Seizing Opportunities

Stability in System Solutions revenue quarter-over-quarter came with a silver lining. The company raked in $1.4 million from delivering QED pilot units to Gridspertise, the world's foremost private distribution grid operator that is jointly managed by Enel and global investment giant CVC Capital Partners.

Once again, this is a remarkable client for Lantronix, considering, according to Gridspertise, that achieving carbon neutrality by 2050, alongside an anticipated 50% rise in global energy demand, necessitates extensive electrification in every sector and a significant surge in renewable energy. Consequently, investors should expect more contracts like this since the upgrading of power grids becomes a worldwide imperative.

What comes next is pivotal. Lantronix is entering fiscal 2024 with what they describe as a "record backlog" and new compute designs in the pipeline. With Gridspertise alone, they're looking at a robust volume production schedule that should kick off meaningfully in FQ2 2024. In other words, they're setting the stage for what could be a very dynamic year, forecasting a 30% growth and targeting revenues between $175 million to $185 million with a non-GAAP EPS of $0.50 to $0.60 per share.

Valuation

The reported Adjusted Earnings Growth Rate of 32.27% is genuinely noteworthy since a rate north of 30% suggests to me that Lantronix is making strategic decisions that amplify their operational success.

Also, LTRX's Blended P/E of 17.62x stands below the stated "Normal P/E Ratio" of 25.60x which, due to this disparity, in my view, could signify a potential undervaluation of the stock. I'd speculate that there's still room for growth in the stock's price, provided the company continues to deliver on its earnings.

Risks & Headwinds

Lantronix posted a gross margin of 39.5% for the quarter—down from 44.4% in the preceding quarter and also a drop from 41.9% in the year-ago period. According to management, the decline can be largely attributed to a strategic pivot towards embedded compute sales at the expense of out-of-band sales, altering the revenue mix and consequently affecting their margins.

But in the company's defense, Whitaker remained positive, noting:

...we expect our sales mix to normalize, with lower compute sales and gross margins closer to the mid-40s.

And from a GAAP perspective, the quarter ended in a net loss of $1.7 million, or $0.05 per share, a shift in tone from the $2.5 million net income, or $0.07 per share, recorded in the same period last year.

Even on a non-GAAP basis, the company's net income of $2.2 million, or $0.06 per share, was eclipsed by the year-ago figure of $2.8 million, or $0.08 per share.

Looking to the quarter ahead, Lantronix projects a sequential drop in revenue. To reiterate, this expectation is rooted in the context that the company's strong performance in FQ4 2023 was driven significantly by the in-flight infotainment systems sector's client—essentially, a one-time deal.

Lastly, an overarching point of consideration is the ongoing search for a new CEO. It's never the best situation without a stable leader at the helm and, naturally, the absence of a permanent one raises an element of uncertainty, which, for some investors, might cast a shadow over the company's strategic direction in the immediate term.

Rating: Buy

I've given Lantronix a 'Buy' rating. Why? They're notably positioned in the rapidly expanding IoT and EV sectors. What's more, they've got a diversified revenue flow and are working with promising partners like Togg and Gridspertise. When I look at their strategic choices, I see avenues for future expansion — we're talking about an anticipated revenue surge of 30% and an encouraging fiscal outlook for 2024. And the numbers? They hint that the market might be undervaluing them, especially when you dive into the P/E ratio discrepancy. Admittedly, there are some red flags, like the ongoing issues with margins and the void in permanent CEO leadership. But stepping back, I believe Lantronix has a bright long-term horizon.