Morgan Stanley: Realtek’s third-quarter profit misses expectations: Can networking support the fourth quarter?

Why did the third quarter miss expectations?

Realtek’s third-quarter 2026 revenue was 37.7 billion New Taiwan dollars, broadly flat sequentially and up 28% year on year, but 5% below Morgan Stanley’s forecast.
Gross margin was 47.4%, up 0.4 percentage points sequentially and down 2.2 percentage points year on year, missing the bank’s forecast by 0.6 percentage points; earnings per share were 8.05 New Taiwan dollars, 21% below its forecast.
Persistent supply bottlenecks and rising upstream costs weighed on results, as customer price adjustments could offset only part of the cost increase.

Management guided for sequential revenue growth and a recovery in gross margin in the fourth quarter. Morgan Stanley believes non-PC demand, particularly networking, can offset continued weakness in the PC business; PCs currently account for about 30% of the company’s total revenue.
An improved product mix and the continued implementation of price adjustments agreed with different customers since June should help gross margin recover. However, supply bottlenecks continue to limit revenue upside and are not expected to ease more noticeably until 2027.
Management is targeting a stable gross margin in 2027, but further increases in foundry and assembly and test costs remain a risk.

Management expects Wi-Fi 7 penetration to rise from about 30% in 2026 to about 40% in 2027; multi-gigabit products already contribute more than 40% of Ethernet revenue, and the share of managed switches is also rising.
High-performance computing and edge AI together account for a high-single-digit percentage of revenue, and the company aims to increase that to more than 30% by 2030. Realtek is expanding its PCIe signal retimer and optical interconnect products, with 100G optical PHY volumes expected to ramp more noticeably in 2027 and 400G and 800G products planned for launch in the second half of 2027.

Incorporating actual third-quarter results, fourth-quarter guidance and resilient non-PC growth, Morgan Stanley raised its earnings-per-share forecasts for 2026, 2027 and 2028 by 1%, 7% and 12%, respectively.
The bank raised its price target from 717 New Taiwan dollars to 800 New Taiwan dollars; the closing price on 29 October was 794 New Taiwan dollars. It said the share price at the time implied a price-to-earnings ratio of about 20 times forecast 2027 earnings, above the historical average but still reasonable relative to its implied target valuation.