IFNNY - Infineon: Underlying Growth Remains Robust

2023-12-23 00:57:57 ET

Summary

• I recommend a buy as I expect growth to remain robust.
• IFNNY reported flat sales in Q4 2023 but beat consensus on EPS, generating meaningful free cash flow.
• Strong demand in automotive, renewable energy, and silicon carbide sectors is expected to drive long-term growth for IFNNY.

Investment action

I recommended a buy rating for Infineon ( OTCQX:IFNNY ) when I wrote about it the last time , as I expected growth to normalize as the business continues to clear its backlog. Doing so, the market should eventually re-value its multiple to its peers’ level. The stock took a big dive before recovering, and I believe the current momentum can continue. Based on my current outlook and analysis of IFNNY, I recommend a buy rating. Underlying demand remains robust for IFNNY, especially in automotive, renewable energy, and silicon carbide. These demand tailwinds are long-term in nature; as such, I expect growth to persist for the medium to long term. Valuation should continue to improve, following the previous few weeks’ momentum, as IFNNY continues to show growth.

Review

IFNNY reported 4Q23 sales of €4.15 billion, which is flattish on a y/y basis and up 1.5% sequentially. Sequential growth was driven by all segments except Power Sensor and System, which reported a revenue decline of 0.5% sequentially. For margins, segment margins came in at €1.04 billion, or a 25.2% margin, leading to 4Q23 adj EPS of €0.65, which beat consensus by 10%. Importantly, IFNNY continues to generate meaningful free cash flow [FCF] of €614 million, driving the total cash position to €3.59 billion. Regarding backlog, it continues to normalize, dropping to €29 billion from €32 billion in 3Q23.

Great performance, and I believe the growth momentum should continue given the strong demand tailwinds that IFNNY is seeing. Firstly, demand for automotive and renewable applications remains robust, and I expect the need for energy security and the growing adoption of electric vehicles [EV] to continue supporting this. Fundamentally, these growing tailwinds mean there will be more need for semiconductor components and content in the value chain or product to convert sources into energy. Take EV, for instance. The more automation it does, the more energy it needs to convert data (e.g., weather, traffic, obstacles, etc.) into application (e.g., turning left or right). Hence, the more advanced the world moves in this direction, the more I expect the amount of semiconductor content to grow exponentially. This also means that IFNNY growth in the EV end-market is not tied entirely to the number of units, which has been a debatable topic as adoption seems to be slowing . We can see the strength of the demand in the backlog as well. Notably, with unfulfilled auto orders amounting to more than twice the annual revenue runrate, the automotive component is still strong even though the backlog has trended down to €29 billion. Management expectations for this segment are to expect a low double-digit growth rate in FY24.

Automotive and renewables aside, silicon carbide demand also remains very strong, and management is expecting > 50% revenue growth in FY24, reaching €750 million in sales. The more notable part is that I believe growth can sustain itself at a very high rate in the near term, given that demand is significantly outstripping supply . I don’t think the underlying demand comes as a surprise, given that most of us already know there is a growing need for semiconductors in the world (AI, cloud computing, data, etc.). The good news here is that IFNNY’s Kulim SiC fab is going to reach a production-ready state by autumn 2025, which will expand its production capacity, enabling a revenue capacity of over €1 billion in 2025. IFNNY also has another potential advantage or tailwind that should further support growth, and that is its strong EV position in China. Given that Chinese OEMs are required to work with well-established chip suppliers to fulfill their worldwide export ambitions (more recognized), the fact that IFNNY is present in a number of popular vehicle models increases the likelihood that these companies will work with IFNNY in the future.

“China, as the most important EV market has shown a resilient growth momentum with many local firms making significant progress. For example, we now have achieved a platform content between $500 and $1,300 per car in more than ten different models, with leading local brands already on the road, more are expected to hit the market in the near future. Also, on the design win side, we saw once again strong momentum. Vitesco Technologies will use the third generation of our AURIX microcontroller family in its next generation of master and zone controllers for upcoming electronic electric vehicle architectures, as well as its -- in its new electrification system solutions. This multi-year agreement shows once again our strength on the system solution side, taking not only into account overall efficiency, but also bringing functional safety and cybersecurity to the next level. The agreement covers the sales volume materially surpassing EUR1 billion.” 4Q23 call

Valuation

I believe the IFNNY upside remains attractive as the underlying growth tailwinds remain robust. IFNNY FY23 performance tracked 100bps above my previous expectations, which was very positive. As demand stays intact, I am expecting IFNNY to hit the high end of its guided range (€17.5 billion) in FY24, representing a 7% y/y growth rate. As the underlying demand is long-term tailwinds, I am expecting this tailwind to support IFNNY growth for the longer term; as such, I am assuming the same 7% growth for FY25 and FY26. In contrast to growth, the EBITDA margin was weaker than I expected for FY23, likely due to weak consumer demand. To be conservative, I am assuming a flattish margin outlook, where positive increments from automotive and silicon carbide demand are offset by the inventory digestion situation. No changes were made to my 10x forward EBITDA assumption as I continue to see valuation improving as IFNNY grows. I would also add that IFNNY used to trade at 9.5x forward EBITDA on average, but margins were lower back then. Now that growth is strong and margins are higher, it should trade higher than average.

Risk and final thoughts

If the global economy slips back into recession, IFNNY will be impacted, and my growth outlook will unlikely come true. IFNNY is exposed to multiple trends, which also means there are more points of failure or weakness. This makes it tougher to understand the IFNNY equity story, especially for retail investors, which means they are going to be more conservative in their estimates, making it harder for its share price to reflect its true value.

In conclusion, I reiterate my buy rating for IFNNY. Key drivers like automotive and renewable energy demand, alongside silicon carbide growth, continue to be robust, and I expect these tailwinds to continue for the long-term. Notably, for automotive, the backlog strength remains very strong with unfulfilled auto orders amounting to more than twice the annual revenue runrate. IFNNY's SiC fab is also going to reach production state soon, expanding its capacity.

For further details see: