VLN - Valens Semiconductor: The Hidden Gem Of In-Vehicle Networking

2023-03-21 03:33:00 ET

Summary

• Valens leverages the high-profit nature of its Audio Video segment to tap into the high-growth nature of autonomous vehicles.
• The company competes against Marvell/AVGO with VA6000 and against ADI/TXN with VA7000. VLN technology uses the MIPI standard, which is the interface used in all smartphones today.
• We value VLN at $11 per share, more than 3x today's price. We note that net cash is 40% of the market today and FCF burn is low.

It has been a while since I last posted on Seeking Alpha, no doubt, I missed it. What pushed me to do so today is the intent to share my analysis on the attractive risk/reward ratio of one of our biggest investments, Valens Semiconductor (VLN).

VLN is an Israel-based Audio/Video fabless chip marker, which derived 70% of its 2022 revenues from the Audio/Video market (medical equipment, education, consumer etc…) with the rest coming from the automotive market (Mercedes Benz the only customer at this point). The Audio/Video ((AV)) market is not sexy by itself and may spook investors who are worried about a "reversion to the mean" of COVID-beneficiaries. That said, the VA6000 developed for the Audio Video market is retrofitted to be used in Mercedes infotainment system (integrating USB, Ethernet, Audio, and Serial Control), which speaks to the R&D synergies across both segments and the operating leverage story of VLN (most important metric in semis). Valens strategy is clear, leverage the profitable audio video market to tap into the high growth aspect of automotive.

To that point, we note that AV gross margins are 70-80% (much higher than the average semiconductor company) and has been consistently so even pre-COVID with 2019 GMs for AV at 80% (2023 guidance implies guidance of $70M revenue and 75% GM). This gross margin profile is well-above semiconductor peers of ~60%.

Summary of company's portfolio:

• VA6000: Used in Audio Video and Mercedes (all models in 2023). The VA6000 transfers AV over long reach cables (up to 100m). The chip uses HDBaseT standard, which is similar to the HDMI standard, but works on longer distances. Sony, Samsung, Panasonic, Siemens, and Logitech are customers of Valens. Revenues are stable from this business with attractive gross margins (high-end of the semis industry). The VA6000 used in Mercedes transfers audio/video and ethernet connection between ECUs. Content is $25 per L2 vehicle.
• VA7000 : Unlike the VA6000, which leverages the HDBaseT standard, the VA7000 leverages the MIPI A-PHY standard. The standard has been adopted by the IEEE and Valens is the primary contributed to this open sourced platform. The MIPI A-PHY standard apply the same technology used in smartphones that connects camera modules to the display, but instead does that over longer distances, which was only done before through the use of "bridging chips". The VA7000 is being sampled to OEMs and will be the primary growth driver for Valens starting 2025.

Summary of what we like in the business:

1) Strong corporate governance with automotive experts on board of directors. Peter Mertens, BOD Chairman, was CTO at Volvo for six years, an executive at GM for eight years, and member of BOD at Audi. He joined Valens board in 2020. Additionally, Yahal Zalka was on boards of Waze, Onavo, DesignArt Networks, all three were acquired by Google, Facebook, and Qualcomm respectively.

2) Multiple added benefits to automotive OEMs:

• VA7000 is the only ready solution in the market today that supports up to 8Gbps download link (from video to ECU) in automotive with Texas Instruments and Maxim Integrated (part of ADI) only supporting 4Gbps. We note that L3+ autonomous vehicles will require 8-16 Gbps in networking bandwidth depending on the number of sensors and display quality (4K display requires 16Gbps).
• Future A-PHY products will allow direct integration between camera (CSI-2) and ECU removing the need for "bridge" connections (see diagram below). Toshiba is a provider of bridging solutions, which carry a $2 ASP. Removing bridging solutions reduce cost and complexity.
• Management has proved OpEx discipline and focus on profitability. Aside from hitting/exceeding all financial targets set for 2022, VLN Adj. EBITDA is expected to be (-$14M) for 2023 versus ($-24M) estimate given back in May 2021. This comes despite softer revenue expectations of $22M ($120M outlook for 2023 provided at de-SPAC date in Q4 of 2021 versus $98M outlook provided in March 2023) given the challenging macro environment.
  • That said, we think management (like many other de-SPACs) have been over-promising on the revenue and design wins front. For instance, StoneRidge partnership (where VLN provides VA6000 to rear camera inside trucks in the after-market) was supposed to ramp in 2023, and Valens guidance of ~$30M implies that there isn't much coming from the partnership. Second, management's change of tone regarding design wins from "first half of 2023" to "sometime in 2023" is worth explanation. We are willing to turn a blind eye on this given the macro environment, but we'd be sellers of the stock in case these targets keep getting pushed.

MIPI Alliance

3) Attractive acquisition target: We believe Marvell ( MRVL ), Broadcom ( AVGO ), Qualcomm ( QCOM ), and Nvidia ( NVDA ) would be interested in adding Valens to their portfolio. We note that Mellanox founder, Eyal Waldman, is an investor in Valens and made the following testimonial in 2021:

As the founder and former CEO of Mellanox Technologies, I know the importance of utilizing data. Data is the basis of our future life. In order to utilize data, you need to store, retrieve, compute and manipulate data. Connectivity is the basis technology for doing all of that, for making data work for you. As an entrepreneur, I've invested in Valens, a semiconductor company based in Israel, because I believe in the team, and I believe that their technology solutions will drive the ADAS and the autonomous market.

4) Partnerships that show portfolio quality :

For further details see: