HNDAF - indie Semiconductor: Growing Into An Autotech Powerhouse

2023-06-12 13:00:53 ET

Summary

• indie Semiconductor, Inc. announced a significant ADAS design win at General Motors in partnership with Sharp Japan, and that it secured initial Vision sockets at Panasonic in support of Honda.
• The company improved its competitive position as the technology leader in automotive radar after its Silicon Radar acquisition.
• Its Q1 2023 revenue, margins, and loss per share exceeded expectations as management continues to execute well on their strategy.
• With its accelerating growth, improving operating leverage, and synergy benefits from acquisitions, I expect that indie will reach profitability in the second half of 2023.
• My 1-year price target for indie Semiconductor is $17.74, which implies an upside of 77% from current levels.

This article was first posted in Outperforming the Market on May 17, 2023.

I have been covering indie Semiconductor, Inc. ( INDI ) since its listing and I am increasingly growing my conviction in the name. I have done a deep dive into indie that spans three parts, going deep into the management team and its competitive advantage. Members of Outperforming the Market were alerted to a buy alert and that position has since generated 75% returns. I also recently shared my analysis of indie's recent quarter, which helped solidify my conviction in indie.

In this article, I will elaborate on why I think indie Semiconductor can outperform in the long term and how it is growing to become an Autotech powerhouse. In summary, indie has an innovative and growing portfolio of Autotech solutions that it has grown through acquisitions that were recently made. As a result, we are seeing indie progress meaningfully in terms of design wins, that will result in program ramps and revenue generation in the future. Lastly, management expects that profitability is within reach in the near term as a result of its accretive acquisition.

I have written prior articles on indie, which can be found here .

Brief introduction to indie

indie Semiconductor is proving to be a contender in the Autotech space as it is building a comprehensive, innovative portfolio of Autotech solutions. For a relatively small company, it boasts large tier 1 suppliers and global OEMs as its customers. It focuses purely on Autotech solutions, and it is gaining design win traction in three areas, which includes ADAS, user experience and electrification. I expect to see the company translate their design wins of today into program ramps and ultimately generate strong growth in revenue and free cash flows.

For members of Outperforming the Market, I have done a deep dive into indie, which can be found here.

ADAS segment gaining traction

For indie, it uses a technology agnostic approach that supports several sensor modalities, including Radar, LiDAR, Computer Vision and Ultrasonic Solutions. indie is then able to merge the data from the above few sensor modalities to provide users with a more accurate and comprehensive perception of the surrounding of the vehicle.

indie's business does not rely on vehicles becoming fully autonomous as they support the continued ramp up and adoption of level two while having the optionality to meet demand from the opportunities that level four and level five autonomy presents.

I think that indie's approach to ramping up investments and focus on higher autonomy markets when the markets mature makes sense economically as the volume ramp is likely much higher around level two at the present moment. There remains to be strong demand amongst OEMs and Tier 1s for advanced safety systems for their next generation vehicles.

ADAS design win

indie announced that it was awarded an ADAS design win at General Motors Company ( GM ) in partnership with Sharp Japan.

This is a first design win for indie with General Motors and the company is unable to elaborate more details at this point.

However, management seems excited about this opportunity given that they suggested that this could involve many of General Motors' new models, which includes its electric vehicle models.

This is certainly material news for indie, and while management could not share more details on it, they did mention that this will be "significant" to indie. In addition, they also mentioned about a global rollout for this design win next year.

Improving leadership in automotive radar

In terms of automotive radar, in 1Q23, indie improved its competitive position as the technology leader in the field after its Silicon Radar acquisition.

Silicon Radar has expertise and specializations in advanced, highly integrated high frequency systems-on-chips for automotive radar. The perfect example of this is that Silicon Radar developed the first ever volume production ready, high integrated 120 GHz radar front-end transceiver in the industry.

indie's LiDAR business under demonstration

indie's Surya LiDAR SOC is one of its differentiating product. It is " designed for high performance LiDAR and integrates both high speed analog to digital converters and digital signal processing to facilitate the reliable detection of long-range targets."

What differentiates Surya is that it brings material improvements in power, performance and cost. As management mentioned in its 1Q23 earnings call they are targeting a Bill of Materials ("BOM") of 80% less than that of the current architectures out there. As a result, this huge differential in pricing tells you how well differentiated this product is within its market.

With regards to indie's Surya SOC program, it is currently demonstrating its technology at several European automotive Tier 1s, and I think we will see progress on the commercialization on the product soon.

Design win within its computer vision offering

The last of the ADAS bucket includes computer vision systems, which help with applications like automated parking, assistance in changing of lanes, highway pilot, amongst others.

In 1Q23, indie managed to increase its design win pipeline as it secured initial Vision sockets at Panasonic ( PCRFY ) in support of Honda ( HMC ).

User experience design wins

indie suggests that OEMs have been increasingly looking to bring about a better in-cabin experience as a differentiating factor for their vehicles.

Interior lighting is one of the areas that indie sees increasing demand today as a result of changing trends and demand for innovative lighting that helps to increase user experience.

In the first quarter of 2023, indie reported that it captured advanced lighting wins with electric vehicle OEMs like BYD ( BYDDF ), NIO ( NIO ) and Li Auto ( LI ).

As a result of existing solid relationships with Tier 1 suppliers and global OEMs, this has allowed indie to offer its products and solutions within its user experience product portfolio to these customers.

Solid 1Q23 quarter

This was indie's eighth consecutive time in being able to beat or meet revenue and gross margin targets after its IPO.

Revenue came in at $40.5 million, up 84% compared to the prior year and grew 22% sequentially.

Gross margins came in at 52.2%, up 484 basis points compared to the prior year and beating its own guidance of 52%.

Operating loss for the first quarter of 2023 came in at just $16.8 million, as indie spent about $38 million on operating expenses. This included $29 million spend in research and development and $9 million spend in SG&A, both of which are crucial to indie, in my view, to grow its sales and drive innovation and product development.

Net loss for the quarter came in at $16 million and loss per share came in at $0.10 per share.

indie has $207 million in its balance sheet, after using $90 million for the acquisition of GEO Semiconductor, $8 million for the acquisition of Silicon Radar, and investing $17 million in working capital to ensure sufficient inventory for the growth plans in the second half of 2023.

Rosy outlook

I continue to like the indie story given that with its growth continuing to accelerate, gross margins improving, as well as its use of operating leverage and the synergies from its acquisitions, I expect that indie will reach profitability in the second half of 2023.

This is a key point given the market we are in today and with the profitability, this helps drive sustainable growth for indie going forward.

On top of that, I think that the strong visibility on orders and continued strength of indie's new product pipeline does help management have the confidence that they will be able to deliver on achieving profitability in the second half of 2023.

In 2Q23, management expects to run at an annualized revenue run rate between $205 million and $210 million, implying $51.9 million in revenue at the midpoint. Management expects gross margins to once again come in around 52% in the second quarter of 2023 as a result of the lower margin inventory from GEO Semiconductor before the effects of the synergy.

On top of that management continues to spend $33 million on research and development and $9 million in SG&A. Thus, management expects to narrow its operating loss to about $15 million in the subsequent quarter. As a result, the loss per share for the next quarter is expected to be around $0.09 per share.

Valuation

indie is currently trading at 26x 2024F P/E, while growing EPS at a rapid clip of more than 100% through 2025. Management continues to expect that it will reach profitability by the end of 2023 and thus, for the full year of 2024, I expect this to be its first full year of positive EPS.

I reiterate my 1-year price target of $17.74 that I shared with the members of Outperforming the Market in the deep dive report on indie, my 1-year target price for the company is. This implies an upside of 77% from current levels.

My target price for indie is based on my DCF model, assuming a discount rate of 12% and a terminal P/E multiple of 9x for indie. I continue to like the risk/reward perspective for indie. It is rare to have such a unique combination of strong growth and profitability in a relatively small market capitalization stock like indie. In addition, it has a strong competitive position with innovative products and a comprehensive suite of Autotech products.

Conclusion

I think that indie Semiconductor, Inc. has once again demonstrated solid execution in what is a difficult and uncertain environment. Its continued growth is exceeding expectations and profitability metrics continue to improve. The acquisitions it has made complements and enhances the overall indie Autotech portfolio while accelerating its path to profitability. The company has been gaining traction in design wins, and I look forward to the company disclosing more on its ADAS design win at General Motors in partnership with Sharp Japan.

The risk/reward for indie appears very attractive for a company growing so rapidly while reaching profitability in the second half of 2023. My 1-year price target is $17.74, as mentioned above, implying an upside of 77% for indie Semiconductor, Inc. stock from current levels.

For further details see: