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Price Performance (1-year)
In Q2-2024, shipments were down 66% YoY, to 1.3M units (Q1: down 66% YoY as well), 18% lower than our estimate. As a result, revenue fell 56% YoY, missing our estimate by 22%
In line with industry standards, Zepp retains 70% of the retail price of its products as revenue, while retailers and distributors keep the remaining 30%.
Zepp does not disclose segmented results:
Self-branded unit shipments fell 36% YoY (Q1: down 60%), amid Zepp halting production of several low-margin products. This strategic move paid off as EBITDA improved by 6% despite a 56% YoY decrease in revenue
Gross margins were up 18 pp to 40%, beating our estimate by 3 pp. Gross margins on self-branded units spiked 16 pp to 44%, well exceeding the sector average of 24%, and approaching Apple's 45%
Zepp spent 26% of revenue on sales/marketing expenses, while Apple typically spends <5%. Operating expenses were down 16% YoY, but 9% higher than our estimate
EBITDA remained negative, but improved due to higher gross margins and lower operating expenses
Working capital, and investments, net of long-term debt was $257M vs the current MCAP of just $43M, implying that ZEPP is trading well below liquid assets
Zepp’s products (Amazfit) accounted for 2.8% of global smartwatch shipments in 2023. It is estimated that global smartwatch shipments will increase by 9% p.a. in 2024 (Source: Statista)
Historically, Zepp's revenue growth rate has averaged 1.6x the global growth rate. Due to Q2 falling short of expectations, we are substantially reducing our revenue and EPS forecasts
We now anticipate EBITDA will turn positive next year instead of this year
As a result, our DCF valuation decreased from $3.78 to $3.48/share
ZEPP remains the most undervalued stock on our list of comparables. Given the company’s negative enterprise value, its shares are trading at -0.01x forward revenue (previously -0.08x) vs the sector average of 2.23x (previously 2.24x)
Applying 2.23x to our 2024 revenue forecast for Zepp, we arrived at a comparables valuation of $4.87/share (previously $6.61/share)
We are reiterating our BUY rating, and adjusting our fair value estimate from $5.19 to $4.17/share (the average of our DCF and comparables valuations). We maintain our view that Zepp is an attractive acquisition target for larger players like Xiaomi. We look forward to the market reaction to the upcoming product upgrades and new releases.
We are assigning a risk rating of 3 (Average)
We believe the company is exposed to the following key risks (not exhaustive):
