We are excited to publish our first stock report on Tekna (TEKNA.OL), the key Apple supplier nobody is talking about, which is one of our top stock picks over the next 3 - 5 years.
Full financial model and 5-year forecast here.
Company Overview: Tekna (~$100M Market Cap) is a world-leading provider of advanced materials and plasma systems. Tekna has developed an IP-protected plasma technology that can transform metal materials such as titanium, aluminum, nickel and silicon into extremely fine powders, which are used in mega secular growth applications, such as 3D printing, consumer electronics, medical implants and aerospace. The company was founded in 1990 and is headquartered in Sherbrooke, Canada. Tekna is traded on the Oslo Exchange under ticker TEKNA.OL.
Investment Thesis: We believe Tekna is in the early innings of a multi-year super cycle as demand for their advanced metal materials grow across applications in 3D printing, consumer electronics, aerospace, automotive and medical. However, what makes us extremely bullish on Tekna is the key win they received with Apple in 2023 to supply the leading smartphone provider with titanium for the casing of next gen iPhones and smartwatches. We expect Apple to adopt titanium into an increasing number of smartphones, wearables, and other devices in the coming years, which could drive demand for 2,500 tons of titanium or $200M in sales alone. Coupled with growing demand in other emerging verticals, we expect Tekna to see 25%+ annual revenue growth over the next 5 years with EBITDA margins approaching 20%. These robust catalysts drive our bullish stance on Tekna shares and price target of 18.33 NOK, which equates to ~120% upside at current levels.
Key Titanium Supplier To Apple: In 2023, Apple launched the iPhone 15 Pro, 15 Pro Max and Apple Watch Ultra, which for the first time included a titanium casing frame, and digital crown, side button and action button on the Apple Watch Ultra. As shown in Tekna’s 3Q23 investor presentation (slide 12), we believe Tekna is one of two suppliers providing Apple’s Asia based contract manufacturer with these initial orders. In 2023, Tekna announced 2 orders totaling 4.6M CAD or ~50 tons of titanium. We believe Apple will look to incorporate titanium into an increasing number of smartphones, wearables, iPads and Macs in the coming years. This could drive demand for 2,500 tons of titanium, or over $200M+ in sales for Tekna alone.
Metal 3D Printing Massive Opportunity: The majority (~70%) of Tekna’s revenues today is driven by metal 3D printing applications. Metal additive manufacturing is one of the fastest growing subsegments within 3D printing as aerospace, automotive, defense and healthcare industries quickly adopt this technology. We expect this market to continue to represent a strong revenue catalyst for Tekna as the Apple opportunity continues to ramp.
Financial Outlook: Tekna is slated to report 2023 results on February 8th and we expect revenues to grow 45% year/year in 2023 to 39.1M Canadian Dollars (CAD). Tekna has a robust backlog of 23.7M CAD as of 3Q23, and expect the company to see 30%+ revenue growth in 2024 and 25%+ through 2028. We do highlight the company has called for 40%+ growth over the mid-long term, but we are taking a conservative approach to see how the Apple opportunity ramps. That said, we do believe these estimates could end up being conservative if the Apple opportunity is as big as we believe it could be. We expect gross margin to be flat / down in 2024 due to favorable pricing they provided Apple to secure the initial deal. We expect Tekna to see gross margins expand long term as the Apple opportunity ramps. We expect Tekna to report an adj. EBITDA loss of 5.5M CAD in 2023, but expect profitability to improve in 2024 driven by operating efficiencies. Driven by robust revenue growth, we expect the company to exceed 23.0M CAD in adjusted EBITDA in 2028.
Valuation: As shown in the table below we use a 5 year Discounted Cash Flow (DCF) model to value Tekna shares. We also value shares in Norwegian Krone (NOK) given they are sold on the Oslo Exchange. Based on our current forecast we value Tekna at 18.33 NOK per share.
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