2023-05-17 15:05:51 ET
Summary
- The stock fell to new lows after a disappointing report, but there is reason to believe the worst may have passed.
- The stock has hit a support level that has held for many years, which could help power a rebound, especially with quarterly results expected to improve.
- While there is reason to be wary of short CEVA, there is also reason to stay away from long CEVA as long as current business conditions prevail.
- Both short and long CEVA have their counterarguments, which means there is one option left to consider.
CEVA ( CEVA ), a licensor of IP for wireless connectivity technologies, smart sensing and other solutions, badly missed earnings estimates in its latest report. CEVA continues to face headwinds in the form of weak demand for the types of chips it provides IP for, the smartphone market in particular. Furthermore, it is not at all clear when the consumer will get back to opening their wallets, which suggests results could stay depressed for some time. The stock dropped after the Q1 report, breaking the 52-weeks low on the way to a multi-year low. However, the stock may have hit bottom by doing so. Why will be covered next.
CEVA missed estimates
The semiconductor market has been dealing with soft demand for a while, especially on the consumer side like smartphones and PCs. CEVA has felt the impact since a lot of its IP targets the consumer. For instance, Bluetooth, which accounts for the majority of unit shipments, is mostly used by consumers. Furthermore, Q1 tends to be down sequentially due to seasonality.
Not much was therefore expected from CEVA with consensus estimates predicting non-GAAP EPS of $0.12 on revenue of $31.5M in Q1 FY2023. However, CEVA fell way short of estimates with non-GAAP EPS of $0.00 on revenue of $28.7M. Licensing, NRE and related revenue totaled $20.7M, a decline of $1.7M YoY, and royalty revenue contributed the remaining $8M, a decline of $4M YoY. Royalties were a problem in Q1.
CEVA posted a GAAP loss of $4.9M or $0.21 per share, triple the loss a year ago. On the other hand, CEVA managed to sign 13 new licensing agreements with high interest in 5G and Wi-Fi 6 technology. Keep in mind though that it may take a long time before these agreements translate into actual royalty payments and some may never reach that stage for various reasons. CEVA had $145M in cash and cash equivalents on the balance sheet with no debt. The table below shows the numbers for Q1 FY2023.
(Unit: $1000, except EPS) | |||||
(GAAP) | Q1 FY2023 | Q4 FY2022 | Q1 FY2022 | QoQ | YoY |
Revenue | 28,735 | 33,402 | 34,391 | (13.97%) | (16.45%) |
Gross margin | 82% | 82% | 81% | - | 100bps |
Operating income (loss) | (4,793) | (1,570) | 468 | - | - |
Net income (loss) | (4,872) | 1,940 | (1,696) | - | - |
EPS | (0.21) | 0.08 | (0.07) | - | - |
(Non-GAAP) | |||||
Gross margin | 84% | 85% | 84% | (100bps) | - |
Operating income | 69 | 5,336 | 5,507 | (98.71%) | (98.75%) |
Net income | 107 | 5,602 | 4,214 | (98.09%) | (97.46%) |
EPS | 0.00 | 0.23 | 0.18 | (100.00%) | (100.00%) |
Source: CEVA
In terms of shipments, licensees shipped 297M units in Q1 FY2023, which is 78M less QoQ and 234M less YoY. Base station and IoT products contributed 270M, including 190M by Bluetooth, and handset baseband chips made up the remaining 27M. The latter was down as much as 73% YoY, which shows how weak smartphone demand has hit CEVA hard. Other segments struggled as well, but not as much. The one exception was cellular IoT, which grew by 19% QoQ to 29M units for a record high.
Management added some color with regard to the royalty payments from the handset business since that one was the weakest of them all. While it acknowledged the results were worse than expected, CEVA considers them to be an anomaly. From the Q1 earnings call:
“On the royalty front, Q1 was an anomaly, we understand in the high side, why the handset market did take a beating, as you said, and if the numbers did drop there, we think it's a short-term and maybe talked about the correction into the second quarter. When you look at the rest of the business and what has been growing at CEVA for the last couple of years dramatically, this is the base station and IoT royalties. There was only a 4% sequential decrease from Q4 to Q1.”
A transcript of the Q1 FY2023 earnings call can be found here .
In fact, CEVA went so far as to predict a recovery as soon as Q2.
“the smartphone and PC markets continue to experience soft demand. However, within our handset and base station customer mix, we expect strong chip shipments recovery in the second quarter. Our licensing, NRE and related revenues business continues to generate customer traction across our diversified portfolio.
In royalties, with several new customers that recently started production, and with the expectation for meaningfully higher shipment volumes of our handset and base station customers in the second quarter, we forecast sequentially higher royalties. Also, the strength of our wireless connectivity markets and customers will continue throughout the year.”
Consensus estimates are counting on a better quarter than Q1. Still, estimates have gone down after the latest results and are now predicting non-GAAP EPS of $0.07 on revenue of $31M in Q2 FY2023. Estimates project non-GAAP EPS of $0.42 on revenue of $129M by the time FY2023 is over. Of this amount, $0.35 is expected to come in the second half since CEVA is expected to earn just $0.07 in the first half. In comparison, CEVA earned $0.78 on revenue of $134.6M in FY2022, implying YoY declines of 46.2% and 4.2% respectively.
CEVA | |
Market cap | $491.27M |
Enterprise value | $363.58M |
Revenue (“ttm”) | $129.0M |
EBITDA | $0.4M |
Trailing non-GAAP P/E | 34.15 |
Forward non-GAAP P/E | 49.90 |
Trailing GAAP P/E | N/A |
Forward GAAP P/E | N/A |
PEG GAAP | N/A |
P/S | 3.78 |
P/B | 1.88 |
EV/sales | 2.82 |
Trailing EV/EBITDA | 931.65 |
Forward EV/EBITDA | N/A |
Source: SeekingAlpha
The downward revisions to earnings estimates have affected valuations for CEVA. For instance, CEVA trades at 49.9 times forward non-GAAP earnings with a trailing P/E of 34.1. In comparison, the median in the sector are 19.6x and 17.4x respectively. Note also that CEVA is in the red in terms of GAAP, which is why CEVA has no GAAP multiples. The table above shows some of the multiples for CEVA.
The stock hits a multi-year low
The stock fell 14.5% on May 10 after the latest report from CEVA. The stock thus hit a 52-weeks and intraday low of $20.51 by breaking the previous low of $23.71 set on October 13. The stock has lost all its gains for the year and is now down 15.6% YTD. Keep in mind that CEVA got off to a strong start in 2023 that saw the stock appreciate by as much as 41.9% for the year by mid-February. The stock has collapsed in recent months as shown in the chart below.
However, it’s worth mentioning that with the new low of $20.51, the stock came within pennies of matching the March 2020 low of $20.45, three years ago. Recall also how the stock bottomed at $20.40 in December 2018 prior to this. There is therefore reason to believe the stock may have hit bottom, at least temporarily, since it appears to be close to what could be support.
It took over two years to do it, but the stock has essentially completed a 100% Fibonacci retracement of the move up, starting from the March 2020 low of $20.45 to the February 2021 high of $83.95, which may convince some the time has come to step in. The December 2018 low of $20.40 and the March 2020 low of $20.45 turned out to be the bottom, suggesting some level of support is present in the $20-21 region.
The stock proceeded to move upwards in the following months on both occasions and that could happen a third time with the May 2023 low of $20.51. The stock is also oversold with an RSI in the low twenties. A bounce under these conditions would not be unusual. Note that the stock closed at $21.60 on May 15, which means the stock has already gained 5.3% since coming within an earshot of the previous two multi-year lows.
Investor takeaways
The stock has been dreadful in the last few months and really the last 2+ years since February 2021. The stock has steadily declined during this time, temporary rallies notwithstanding. The latest drop was driven by worse-than-expected quarterly earnings. While the Q1 results may have been an anomaly as CEVA says it was, and it's possible the next report will be better than the one before, CEVA is likely to continue to struggle as long as demand stays depressed, especially if the consumer keeps pulling back on spending on the kind of stuff that matter to CEVA like mobile devices.
This weak consumer spending is driven by a number of factors, weak economic conditions in particular. Since this is not expected to get much better anytime soon, it’s unlikely CEVA can expect to see much improvement while conditions are unfavorable. They may get better somewhat, but great strides are unlikely to be seen in the immediate future.
With that said, I would not short CEVA even though doing just that has been a winning bet for over two years. True, multiples are high, the stock is under pressure and the current business environment does not favor a company like CEVA, but that does not necessarily guarantee the stock will continue to head lower, at least in the short term.
The charts suggest the stock has found support, which has held for many years. The stock looks due for some sort of bounce, if only because it has already been punished so much. The stock could also get a lift from pre-positioning in anticipation of a rebound in H2 2023, which CEVA itself has called for and which earnings projections are expecting.
Keep in mind CEVA is expected to earn $0.35 in H2 after just $0.07 in H1. The rebound may not come to fruition, but most of the market is likely to give CEVA the benefit of the doubt that the worst has passed. The fact that short interest in CEVA is so low at just 2% of the float is a sign that most feel shorting is not worth it.
I therefore remain neutral as stated in a previous article . Short CEVA is a risky bet at this point for reasons discussed previously. On the other hand, there is not enough evidence to suggest long CEVA is a bet that has a good chance at success. If the second option is to become viable, there needs to be more concrete signs CEVA is clearly on the path to recovery. At this time, this is not the case. Staying neutral is thus the option that makes the most sense in my view.
For further details see:
CEVA May Have Finally Hit Bottom After A Multi-Year Decline