Chroma’s third-quarter revenue surges as Morgan Stanley sees testing growth continuing into 2027
Semiconductor and photonics businesses drove Chroma’s third-quarter revenue up 32% quarter on quarter. Morgan Stanley raised its earnings forecasts but lowered its target valuation multiple as sentiment toward the AI sector became more cautious, leaving its target price unchanged.
Original source：Morgan StanleyFirst published on Unhidea：Original source date：
Key takeaway
Morgan Stanley expects demand for Chroma’s power-supply, semiconductor and photonics testing to continue growing in 2027, but product mix and AI capital expenditure are important constraints on earnings and valuation.
Where did third-quarter growth come from, and can profits keep pace?
Chroma reported third-quarter 2026 revenue of NT$17.926 billion, up 32% quarter on quarter and 180% year on year. Morgan Stanley attributes the main impetus to the semiconductor and photonics businesses, while power-supply testing may also remain at a high level.
The bank expects third-quarter earnings per share of NT$13.71, up 13% quarter on quarter and 15% year on year. It expects gross margin of 60.5%, unchanged from the previous quarter: the benefits of increased scale are broadly offset by a less favorable product mix. Operating margin, meanwhile, is expected to rise by 0.5 percentage points quarter on quarter to 39.3% thanks to operating leverage.
Why can power-supply and chip testing sustain growth?
Morgan Stanley expects power-supply testing revenue to grow 51% year on year in 2027, accounting for 42% of company revenue. Rising power consumption by AI clusters is driving demand for higher-specification testing tools; the bank expects global demand for power supplies to grow at a compound annual rate of 75% over the next three years.
In chip testing, system-level testing (SLT) is used to detect defects before AI systems are assembled. The bank believes wider adoption of this process by high-performance computing chip designers, together with increases in chip counts and thermal design power, will benefit Chroma, an early entrant to the market. Management also noted that major customers still prefer standalone testing equipment.
The bank expects semiconductor and photonics revenue to grow 58% year on year in 2027, accounting for 40% of total revenue; expansion of advanced packaging capacity also creates demand for the company’s measurement equipment.
What additional growth will optical testing and new products bring?
Morgan Stanley expects optical transceivers to remain the mainstream solution, with their testing equipment a source of growth; co-packaged optics (CPO) and near-packaged optics (NPO) architectures also require testing tools. Chroma has obtained certification for CPO optical engine testing and system-level testing.
Chroma previously focused mainly on SLT in high-performance computing testing. Its first final-test handler, launched this year, is undergoing certification. The bank expects the company to expand this new business in 2027 by drawing on its existing customer relationships and technical experience.
Why is the target price unchanged despite higher earnings forecasts?
Based on strong actual third-quarter revenue and operating leverage at the profit level, Morgan Stanley raised its earnings forecasts for 2026 through 2028 by 10% to 14%. At the same time, it lowered its target price-to-earnings multiple from 45 times to 40 times forecast 2027 earnings to reflect recent fluctuations in market sentiment toward the AI sector.
The two adjustments offset each other, leaving the target price unchanged at NT$2,800 and the rating at Overweight. The bank believes that if major cloud service providers focus more on returns from AI capital expenditure, high-performance computing-related revenue could come under pressure. Lower-than-expected AI capital expenditure and slower expansion of advanced packaging capacity are also risks.
