After enduring two years of a chilly downturn, the consumer electronics sector is finally showing signs of recovery as we enter 2024. Leading players in the industry such as Lens Technology (300433.SZ), GoerTek (002241.SZ), and Changying Precision (300115.SZ) have also experienced significant growth in performance and valuations, creating a harmonious synergy often referred to as the "Davis Double Play."

GoerTek, in particular, has witnessed a remarkable rise of over 50% since the latter half of September.

However, this upward momentum comes after GoerTek faced considerable challenges, including a relentless decline starting back in 2021 that saw its stock plummet by upwards of 70%.

With over 300,000 shareholders, one might wonder whether GoerTek's stakeholders can finally breathe easier and witness a turnaround.

Yet, it is premature to draw conclusions. The current rally for GoerTek appears to be more a byproduct of a broader recovery in the consumer electronics sector rather than a robust rebound originating solely from the company itself.

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In fact, when viewed over a longer timeline, GoerTek's own performance regarding valuation and fundamentals has notably deteriorated within the industry.

At the height of its market capitalization in 2021, GoerTek ranked as the third-largest player in the consumer electronics space, trailing only Luxshare Precision and Foxconn Technology. Currently, its market capitalization has slipped to the fifth position, surpassed by both Lens Technology and Transsion Holdings.

From a profitability perspective, GoerTek reported a net profit growth of 162.88% year-on-year in the first three quarters of this year. However, this spike is largely attributed to a lower base from the previous year. When compared longitudinally from 2021 to Q3 2024, GoerTek's net profit has also dwindled from the top three to the fifth spot within the industry.

In my view, two core issues have persisted at GoerTek over the years:

1. Over-reliance on concentrated clientele.

2. Unsuccessful diversification efforts.

First, let's delve into the issue of customer concentration.

GoerTek's heavy reliance on major clients has historically been detrimental. A notable instance occurred when Apple slashed orders for their headphones, resulting in a severe drop in GoerTek's performance.

On November 8, 2022, GoerTek announced that it had received notice from a significant overseas client to halt production of a particular smart acoustic product. Sources within the industry suggested that this overseas client was Apple.

The impact of this notification resulted in direct and asset impairment losses for the company, estimated between 2 to 2.4 billion yuan. Subsequently, on December 2, 2022, GoerTek revised its performance forecasts, revealing a 59.08% drop in net profit compared to the previous year.

Now, two years have passed, and the issue of customer concentration has not only persisted but has become even more pronounced.

In 2021, sales to GoerTek's top five clients accounted for 86.54% of its total revenue; by 2023, this figure has surged to 88.75%.

While the company did not disclose specific sales figures or percentages in its semi-annual report for 2024, it did caution against the risks associated with concentrated client relationships.

This indicates that GoerTek's performance will still largely depend on the whims of its major clients.

Next, let's turn to GoerTek's challenges in diversification.

Originally known as a pioneer in acoustic electronics, GoerTek has made attempts to diversify, particularly in the VR headset market. Unfortunately, this sector has yet to gain substantial traction, with its future prospects remaining uncertain.

Globally, the AR/VR headset market has been characterized by a significant disconnect between excitement and consumer purchases. Although the market garners much discussion, actual sales remain disappointingly low.

In 2023, global shipments of AR/VR headsets fell by 23.5%. The decline persisted into 2024, with shipments in the first quarter decreasing by 67.4% year-on-year and a 28.1% drop in the second quarter.

Reports indicate that Apple may cease production of its headset devices by the end of 2024.

GoerTek has classified VR, AR, and MR (mixed reality) products under its smart hardware division, a segment that currently faces challenges. This vertical accounted for 49.15% of the company's revenue in the first half of this year, an impressive share. However, it reported a mere 9.24% gross margin, significantly lower than the 22.46% gross margin seen in GoerTek's precision components business.

All things considered, the rapidly evolving nature of the consumer electronics industry signifies that maintaining agility and seizing opportunities are critical. For GoerTek, capitalizing on current industry vitality means securing new orders and prioritizing survival, while diversifying its offerings slowly over time — perhaps, in the future, a brighter outlook awaits.

Risk Disclaimer:

The stock market carries risks; investment should be approached with caution. This article does not constitute investment advice, and readers are encouraged to think independently.