Keysight’s 2023 Investor Day Preaches Continuity

We maintain our $175 fair value estimate for wide-moat Keysight Technologies KEYS after the company’s 2023 investor day. Keysight’s executive team largely emphasized continuity of the firm’s existing strategy, which we see as having generated shareholder value and carved a wide economic moat. The firm provided updated financial targets for fiscal 2026, which were above the prior targets from its 2020 investor day but largely in line with our existing forecast. While we see the long-term prospects as bright for Keysight, the current fiscal year should remain a tough environment, as management mentioned during the first-quarter earnings call two weeks ago. We see the shares as close to fairly valued.

Keysight continues to focus on expanding its mix of software and services, selling sticky solutions, and pursuing secular trends like 5G and electric vehicles. We note success on its 2020 investor day targets. Between fiscal 2019 and fiscal 2022, Keysight achieved 8% sales growth compared with a goal of 4%-6%, achieved 29% non-GAAP operating margin compared with a goal of 26%-27%, and achieved 17% non-GAAP earnings growth compared with a goal of 10%.

Keysight’s targets through fiscal 2026 are more bullish. Management now believes its serviceable addressable market is nearly $21 billion and growing at a 5% rate, compared with its 2020 estimates of $17.5 billion and 4% growth. The firm is targeting 5%-7% growth, 66%-67% non-GAAP gross margin, 31%-32% non-GAAP operating margin, and more than 10% non-GAAP EPS growth. We have confidence it can achieve and even beat these targets. We also note consistency in its approach to capital allocation, with organic research and development as the top priority, followed by strategic acquisitions and shareholder returns. We like these capital allocation priorities and note a newly announced $1.5 billion share-repurchase authorization.