2023-05-08 17:18:42 ET
Summary
- INDI offers tremendous growth potential, and this is not adequately captured by forward valuations which look cheap relative to history.
- The GEO acquisition enhances INDI's positioning in the market whilst also improving its financial profile.
- The technicals suggest there is good risk-reward at current levels.
Introduction
indie Semiconductor, Inc. ( INDI ), is a small-cap stock that offers automotive-based semiconductor and software solutions that are leveraged by tier-1 vendors and then deployed by some of the leading auto manufacturers around the world (see image below). Put another way, INDI can be considered a decent enough proxy to play the growing auto tech revolution.
We are bullish on the INDI stock, and here are the three key reasons which buttress our long thesis
Strong growth potential leaves a mark on forward valuations
Quite unlike the norm a decade or so ago, these days, most car consumers across the major global auto markets tend to give greater precedence to features, safety, and on-board electronics, rather than the performance of the vehicle.
INDI looks well-poised to profit from this trend, even as it focuses on churning solutions that could cater to three of the highest growth applications in the auto industry- Electrification, User experience, and Safety systems (ADAS).
Already we’ve seen INDI demonstrate solid revenue growth numbers; over the last three years, revenue has grown at an impressive CAGR of 70%, and since its listing date nearly two years back, the revenue has surged by 5x (also note that the quarterly revenue has continued to make sequential progress for seven straight quarters)!
Normally, given the strong base, you would expect some slowdown in the growth potential, but such is the scope of growth in this market. As of November 2022, the backlog stood at an impressive $4.3bn, more than 2x as much as what was seen in FY20-$2bn. Given this, INDI will likely witness whopping top-line growth of 125% in FY23 (estimated sales figure of $249m ), with sales poised to more than double and hit levels of $560m in two years' time!
In light of strong visibility, and these heady top line forecasts for the foreseeable future, we feel that INDI's price-to-sales multiple comes across as very cheap. Based on the FY24 revenue figure, the stock only trades at a forward P/S of 2.9x, a 17% discount to the historical forward P/S average multiple.
GEO Semiconductor acquisition enhances INDI's positioning in the auto tech market
INDI has ambitions of playing a vital role in enabling the uncrashable car, but to get there, one needs a comprehensive offering that adroitly utilizes and combines the capability of various sensors, such as LiDAR (Light Detection and Ranging), RADAR, ultrasonic, and cameras. A more well-rounded and fluid sensor fusion offering (combining all these sensors) can play a stellar role in analyzing environmental conditions and making effective decisions during navigation.
In March 2023, INDI took another step forward in making this offering more compelling by completing the acquisition of Geo Semiconductor, an entity that specializes in video processing capabilities for automotive cameras and already enjoys established commercial relationships with over 20 Tier 1 suppliers.
It's no surprise to discover the growing proliferation of these cameras in a vehicle (the image below gives you a sense of the growing omnipresence of these objects), given the role they play in functions such as lane detection, night vision, occupant monitoring, surround view, blind spot detection, automated parking etc. In fact, going forward, IHS believes that the global auto market will require 430 million camera electronic controls by 2028, up from levels of 265 million in 2023 (implying a CAGR of 10%)
Besides the compelling IP on offer (GEO has 100 global patents), the GEO acquisition will also play a key role in enhancing INDI’s financial profile. First of all, the potential to facilitate revenue synergies will be massive, particularly on account of increased cross-selling opportunities and better geographic reach (for instance, GEO is already well placed with tier 1 OEMs in Japan , whilst INDI has found it challenging to make quick progress in this market).
Then GEO itself is quite a fast-growing business; revenues have doubled over the last two years, and GEO is expected to contribute incremental revenue of at least $40m to INDI's top line in FY23). Finally, this acquisition is also expected to be earnings accretive to the FY23 EPS, thus enabling INDI’s H2 EPS to turn positive (Only in FY24 will INDI’s FY EPS turn positive)
Attractive risk-reward on the charts
Investors fishing for ideal value opportunities within the semiconductor universe could likely have INDI as one of the prime candidates. Note that the relative strength ratio of the stock versus the SPDR S&P Semiconductor ETF is currently roughly ~48% below the mid-point of its range, and could likely witness some mean reversion towards those levels.
Then, one can also take heart from the fact that bearish sentiment towards INDI's stock appears to be dissipating. At the start of December last year, the percent of float that was short was in double-digit terms, but that has steadily declined over recent weeks and is currently only at the 9% levels. Despite reduced short interest, there's still decent potential for a short squeeze, as the days-to-cover ratio is hardly low at over seven days.
Finally, things also look quite encouraging on INDI’s own weekly chart. Firstly, note that during the whole of 2022, we saw a flattening out of the price action, with the stock building a base around the $5-$9.5 levels. Since then, the price action has gradually coalesced into an ascending channel of sorts with a brief uptrend underway. I believe the current price level represents a good point to get on board, as the stock has recently dropped to the lower boundary of the ascending channel, which gives one a nice solid runway to hit the upper boundary.
The stock could also receive additional support from INDI’s enhanced share buyback program. So far, the company has only deployed ~15% of its $50m buyback war chest, and you'd expect a significant chunk of that to be put to good use at these levels.
For further details see:
3 Reasons To Buy indie Semiconductor Stock