VLN - Valens Semiconductor: Progress But Also In Startup Mode

2023-03-10 07:32:18 ET

Summary

• Valens Semiconductor has lots of good things to look forward to in a number of areas, but it will first need to get through a few headwinds.
• The prospect of increased losses may disappoint some, but it may actually be a good thing in the long run.
• VLN stock has underperformed, and the charts suggest the stock could go lower, possibly all the way to last year’s lows.
• Long VLN is worth considering, but it may be better to wait as better entry points may be around the corner.

Valens Semiconductor ( VLN ), a supplier of high-speed video and data connectivity solutions to the audio-video and automotive markets, is very much a startup. The latest report from VLN makes this clear. Nevertheless, VLN is not sitting still and it is making progress with an eye towards the future. However, VLN will still have to deal with several headwinds in the short term. Why will be covered next.

A mix of good and bad from VLN

VLN managed to exceed expectations for the top and the bottom line in its latest report. Consensus estimates expected a GAAP loss of $0.12 per share on Q4 revenue of $23.2M, but VLN did better with a loss of $0.07 on revenue of $23.47M, an increase of 13.2% YoY and a record high. In terms of non-GAAP, VLN posted a loss of $0.03 per share, which is half the loss a year ago. The table below shows the numbers for Q4 FY2022.

Source: VLN Form 6-K

If the Q4 numbers are out, then so too are the numbers for the whole year. FY2022 revenue increased by 28.3% YoY to a record $90.7M. The audio-video segment contributed $74.5M, up 18.7% YoY, and the automotive segment contributed the remaining $16.2M, up 105.2% YoY. VLN finished with a GAAP loss of $27.7M or $0.28 per share and a non-GAAP loss of $17.1M or $0.17 per share. VLN had $148.4M in cash, cash equivalents and short-term deposits on its balance sheet with no debt.

The decline in margins is due to changes in product mix. The automotive segment grew much faster than the audio-video segment and the latter comes with higher margins than the former. Remember that VLN went public in Q3 FY2021, which is why the number of shares outstanding rose dramatically. The table below shows the numbers for FY2022.

Source: VLN Form 20-F

Guidance calls for Q1 FY2023 revenue of $23.6-23.8M, an increase of 9.72% YoY at the midpoint. The forecast calls for adjusted EBITDA of minus $5.9-6.5M, which means losses are expected to increase compared to the preceding quarter and compared to a year ago. There are several reasons why this is so.

For starters, some customers, notably in the audio-video segment, are in the process of working through their inventory, which will restrain top-line growth in the first half of 2023. Secondly, automotive revenue is expected to account for a greater proportion of revenue, which will pressure the bottom line since it comes with lower margins. Finally, VLN is spending heavily on new products, including mass production of the new VA7000 chip for the automotive market, the development of the next-generation VA7100 and the tape-out of the new VS6320 for the audio-video market. All of this will pressure the bottom line, at least in the short term.

While the prospect of increased losses might be disappointing to some, it's worth mentioning that the numbers will improve, especially in the second half of the year. VLN still expects to break even on an adjusted EBITDA basis by the end of FY2023. The outlook for FY2023 sees VLN ending with revenue of $97-100M and an adjusted EBITDA loss of $13.6-15.4M. From the Q4 earnings call:

For the full year 2023, we expect revenues to range between $97 million and $100 million. We expect sales growth to be a little bit steeper in the second half of the year. As we anticipate substantially more automotive revenue in 2023 compared to 2022, up from 18% of our total annual revenues to a range of 27% to 29%, we expect gross margin to be in the range of 62% to 62.7%. The adjusted EBITDA is expected to be a loss in the range of $15.4 million to $13.6 million. We remain on track to reach adjusted EBITDA breakeven by the end of 2023, which means that in 2024, the company should reach cash flow profitability."

A transcript of the Q4 FY2022 earnings call can be found here .

Consensus estimates predict VLN will post a GAAP loss of $0.09 on revenue of $23.7M in Q1 FY2023. At the same time, estimates predict VLN will nonetheless end up with a GAAP loss of $0.13-0.37 on revenue of $98.5-99.8M by the end of FY2023. In other words, VLN will get off to a slow start in FY2023 due to the previously mentioned headwinds, but VLN will recover in the second half to end the year on a high note. Estimates expect this momentum to continue in FY2024. Estimates predict GAAP income of ($0.10)-$0.11 on revenue of $123.5-186.3M in FY2024.

The lack of profits is the reason why VLN does not have multiples for most metrics, including P/E ratios. Still, the company is valued at 4.25 times sales with a market cap of $403.4M. In comparison, the median in the sector is 2.68x. VLN may not be among the most expensive stocks out there, but it still comes at a premium in terms of asking price.

Source: Seeking Alpha

The charts suggest it's time to wait

VLN may have better days ahead, once it gets past the headwinds in the short term, but market sentiment is decidedly bearish towards the stock. Most semis have outperformed in 2023, but VLN is an exception. The stock was up 9.9% in late January, which might not sound bad, but it was much less in comparison to other semis.

The gap has only gotten wider since. The stock has lost 26.6% YTD. In comparison, the iShares Semiconductor ETF ( SOXX ) has gained 21.2% YTD, making VLN one of the worst performers in the semiconductor space in 2023, a year in which many semis have achieved strong gains. The chart below shows how the stock has underperformed in 2023.

In addition, there is reason to believe the recent slide has further to go. The stock has fallen below support in recent days. Support in the $4.25-4.75 region managed to keep the stock afloat for several days, until the 6th when the stock managed to break through. The stock at its current price of $3.94 has declined 34% since the intraday high of $5.99 reached on January 24th.

The stock could potentially make it all the way back to around $2.71, the 52-weeks low set on June 3, 2022, which marked the bottom after the slide that started in November 2021. The stock started its uptrend from that point on and a move back towards $2.71 or so would complete a 100% retracement for a possible double bottom. This would make for a good entry point to go long VLN, assuming of course the stock gets there.

Investor takeaways

VLN is a startup for all intents and purposes. As a consequence, VLN has to invest to facilitate future growth. VLN is working on several new products simultaneously, particularly in the faster growing automotive segment, which increases operating expenses and puts downward pressure on the bottom line. It may be disappointing to see guidance calling for losses to increase in the near term, partly due to all that spending. On the other hand, these investments also pave the way for growth to accelerate to another level.

The company is still in the red, but it appears to be making progress towards breaking even in terms of adjusted EBITDA by the end of FY2023. It's possible VLN could report its first GAAP profit at some point in FY2024. If VLN is to get there, it will most likely be due to the automotive segment. This segment more than doubled in size in FY2022 and there are good prospects for continued growth, especially once the new products in the pipeline hit the market.

Growth is expected to be relatively modest in the short term with estimates predicting a GAAP loss of $0.13-0.37 on revenue of $98.5-99.8M in FY2023, compared to a loss of $0.18 on revenue of $90.7M in FY2022. On the other hand, growth is also projected to accelerate to achieve GAAP income of ($0.10)-$0.11 on revenue of $123.5-186.3M in FY2024. VLN may be close to the dawn of a new era in terms of growth.

However, while the long-term picture looks better for VLN, the fact remains that VLN will still have to deal with several headwinds in the short term. VLN's own outlook acknowledges that growth will be relatively subdued in FY2023, especially in the first half with customers sitting on excess inventory. While heavy spending could pay off down the road, losses are expected to go up before they have a chance to go down, if not go away entirely. The bottom line is under pressure.

The charts also suggest that the recent slide in the stock may not yet be over. The stock fell below an important support level in recent days and it's possible the stock is heading for a retest of last year's lows. The stock has underperformed all year in what has been a good year for most semis and, while past performance is not indicative of future results, odds are the stock will at the very least remain under pressure for a while with the way the charts are laid out and growth expected to be more or less on hold in the first half of 2023.

I am neutral on VLN. Some may want to go long VLN with an eye towards a potential recovery in late 2023 and particularly in 2024 when growth is expected to accelerate. The caveat here is that one must be willing to accept the risk of the stock going down in the near term due to the presence of headwinds. VLN is not a bargain per se, but current multiples could be worth it assuming growth projections are accurate.

If people can accept a possible short-term hit in exchange for a payoff down the road, then long VLN is worth taking into consideration at this point. On the other hand, if people are convinced the charts are pointing to lower prices in the near future, then it may be better to wait as better entry points may be around the corner.

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