On Tuesday, ZTE Corp. (HKG:HK:0763) (OTC:ZTCOF (OTC:ZTCOF)) stock experienced a downgrade in its rating by a Jefferies analyst, moving from "Buy" to "Underperform." Accompanying this downgrade, the price target for the company's shares was also significantly reduced to HK$10.30, a drop from the previous HK$23.22.
The adjustment in ZTE's outlook by the analyst is attributed to a projected decline in capital expenditure (capex) by Chinese telecommunications companies, which is expected to decrease by around 5% year-over-year in 2024.
This anticipated fall in wireless capex to merely 36% of the total is seen as a limiting factor for ZTE's gross margin potential. The company's position in the server market is also under scrutiny, with expectations that ZTE may lose market share to competitor xFusion in this segment.
Furthermore, as the industry shifts towards artificial intelligence (AI) servers, the analyst notes that ZTE does not appear to be well-positioned to capitalize on this trend. This outlook has led to a reduction in net profit forecasts for ZTE, which are now 30%-38% below the consensus estimates.
The valuation of ZTE, previously at 2.3 times the price-to-earnings growth (PEG) ratio, is now considered high by the analyst. The new price target is based on a lower PEG ratio of 1.5 times. This recalibration reflects concerns over the company's growth prospects amidst a challenging environment of declining capex and increased competition.
InvestingPro Insights
In light of the recent downgrade by a Jefferies analyst, investors might seek additional perspectives on ZTE Corp's (OTC:ZTCOF) financial health and market position. According to InvestingPro data, ZTE Corp holds a market capitalization of approximately $9.5 billion USD, with a P/E ratio of 14.15, which adjusts to a more attractive 12.16 when considering the last twelve months as of Q4 2023. The company's PEG ratio during the same period stands at 0.91, suggesting a potentially favorable growth valuation when compared to the industry standard.
InvestingPro Tips highlight that ZTE Corp is trading at a low earnings multiple and possesses a strong free cash flow yield, which could be seen as indicators of undervaluation. Moreover, the company's status as a prominent player in the Communications Equipment industry, alongside predictions by analysts that the company will be profitable this year, might provide some counterbalance to the concerns raised by the recent analyst downgrade. For investors seeking further analysis, there are additional InvestingPro Tips available that could shed light on the investment potential of ZTE Corp. For those interested in a deeper dive, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription at InvestingPro.
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