Lotes’ gross margin under pressure as Morgan Stanley bets on a recovery from new platforms
Higher copper, gold and plastic prices weighed on third-quarter gross margin, but the transition to new CPU platforms could give Lotes an opportunity to pass on costs. Morgan Stanley upgraded the stock and expects AI products to contribute more rapidly in 2027.
Original source：Morgan StanleyFirst published on Unhidea：Original source date：
Key takeaway
Morgan Stanley expects Lotes’ gross margin to bottom out in the third quarter, with repricing of new CPU sockets and a ramp-up in AI connectors potentially driving subsequent earnings growth.
Why might revenue growth still be accompanied by earnings below expectations?
Lotes has reported unaudited third-quarter 2026 revenue of 9.924 billion New Taiwan dollars, up 4% quarter on quarter and 18% year on year. But higher copper, gold and plastic costs are affecting older products, while adoption of new products has been slower. Morgan Stanley expects gross margin to fall to 44.6%, below the market consensus of 45.8%.
The bank expects third-quarter operating expenses to fall 12% quarter on quarter, driving a 17% increase in operating profit to 2.452 billion New Taiwan dollars, still 6% below market consensus. It expects net profit of 2.174 billion New Taiwan dollars, up 10% quarter on quarter and down 6% year on year; earnings per share are expected to be 19.36 New Taiwan dollars, 4% below market consensus.
What could drive a fourth-quarter gross margin recovery?
Morgan Stanley expects the transition to new server platforms to accelerate from the fourth quarter of 2026: AMD Venice CPU sockets will begin ramping up during the quarter, while Intel Oak Stream CPU sockets are expected to ramp up in the first quarter of 2027. New platforms offer an opportunity to reprice, making it easier for Lotes to pass higher input costs on to customers.
The bank’s supply-chain checks also indicate that motherboard production at server contract manufacturers could rebound in the fourth quarter after a slight decline in the third. It expects Lotes’ fourth-quarter revenue to be approximately 10.5 billion New Taiwan dollars, up 5% quarter on quarter; gross margin to recover to 45.9%; and earnings per share to be 21.11 New Taiwan dollars.
When will AI products begin to change the revenue mix?
QD products already accounted for 2%–3% of revenue in September 2026, and Morgan Stanley expects their contribution to continue growing in the fourth quarter and in 2027; SOCAMM connectors are expected to account for approximately 7% of revenue in 2027.
Lotes has two NPO opportunities, one through LINTES and the other through direct participation; the direct project is expected to ramp up in the second half of 2027. The bank expects NPO’s contribution to remain small in 2027 and expand in 2028.
Combining QD, SOCAMM and NPO, the bank expects AI revenue’s share to rise from approximately 5% in 2025 to slightly above 20% in 2028, with the largest increase occurring in 2027.
How have earnings forecasts and valuation assessments changed?
Taking into account unaudited third-quarter revenue and its latest supply-chain checks, Morgan Stanley cut its 2026 earnings-per-share forecast by 4% while raising its forecasts for 2027 and 2028 by 4% and 13%, respectively.
The bank upgraded the stock from Equal-weight to Overweight and raised its price target from 2,045 to 2,350 New Taiwan dollars. The new target implies approximately 22 times forecast 2027 earnings, above the average forward price-to-earnings multiple of 17.4 times over the past three years; the bank believes improving gross margin and a rising AI revenue share can support a higher valuation.
