Summary
- indie's acquisition of GEO Semiconductor brought many positives, including new customers, new capabilities and an accelerated path to profitability.
- B Riley Securities upgraded indie to a Buy rating and increased their Price Target for indie by 58% to $13 as a result of the acquisition.
- The fourth quarter result came in with strength, beating expectations, while the company remains very well funded with sufficient cash for growth.
- Management's guidance was solid, with the company expected to reach profitability as soon as the second half of 2023.
- My 1-year target price for the company is $17.74. This implies an upside of 75% from current levels.
This article was first posted in Outperforming the Market on 19 February 2023.
indie Semiconductor ( INDI ) recently has seen a relatively strong performance in share price as a result of recent announcements and its fourth quarter earnings release (which I shared with members of Outperforming the Market earlier ). I think that indie's recent strong financial performance highlights the company's innovative AutoTech products that are supported by a large patent portfolio and a talented global team.
Investment thesis
With indie, I think that the company continues to execute well even when the global macro environment is uncertain and other companies are experiencing cyclical downturns.
Even when the company continues to grow at a hypergrowth rate, management expects that profitability can be achieved sooner than expected, by the second half of 2023. indie's near-term growth will be supported by a strong innovative portfolio of products and its large strategic backlog. Furthermore, the company has a very healthy balance sheet to support its near-term growth.
In addition, I think that indie's recent acquisition of GEO Semiconductor complements its business as it brings new capabilities and new customers and an accelerated path to profitability.
I think that indie is on its path towards being a leader in AutoTech as management's solid execution, its strong innovative portfolio of products and a large established customer base and huge strategic backlog will enable this to materialize.
I have written an earlier article that explains why I think that indie is an emerging AutoTech Player that is well positioned for long-term growth.
Perfect acquisition target
As I shared with members of Outperforming the Market in an earlier article for the reason for the recent strong gains that indie generated last week, a large part of that was due to its announcement of GEO Semiconductor.
On 9th February 2023, indie announced that it is acquiring GEO Semiconductor .
Who is GEO Semiconductor? The company is a private fabless semiconductor supplier, and it is a market leader in video processors for automotive cameras.
Automotive cameras and image processing systems are crucial given that there are more than 20 cameras for the next generation of automotives as they are used for more purposes, including lane changing, night vision, driver monitoring, amongst others. IHS is expecting that camera Electronic Control Units needed to support the global automotive market will grow from 265 million in 2023 to 430 million in 2028.
This acquisition immediately brings scale to indie Semiconductor's own image processing program and helps to bring an even more comprehensive portfolio of sensor solutions in advanced driver-assistance systems ("ADAS") applications.
indie Semiconductor is buying GEO Semiconductor for $180 million. The deal consists of $90 million cash, plus about 12 million in indie class A common shares, based on a 20-day VWAP.
In addition, indie Semiconductor expects the acquisition to be accretive to 2023 non-GAAP earnings per share. The company also said it is reaffirming 4Q2022 guidance and expects to post 2022 top line growth of 129 percent versus 2021.
Lastly, GEO Semiconductor has a strong technological advantage protected by intellectual properties. GEO Semiconductor has industry leading sensing and viewing capabilities that are protected by 100 global patents.
Acquisition brings large customers and cross-sell opportunity
The acquisition of GEO Semiconductor brings some of the largest Korean and Japanese automotive OEM players to indie Semiconductor. Currently, GEO Semiconductor's customers include Toyota ( TM ), Nissan (NSANY), Kia, Hyundai (HYMLF) and Honda ( HMC ).
On top of this stellar list of top automotive OEM players, GEO Semiconductor has design wins with more than 20 Tier 1s and 400 car models. This means that GEO Semiconductor will bring to indie Semiconductor many cross-sell opportunities as indie Semiconductor will have an excellent opportunity to penetrate these large players and bring more design wins for the company.
Analyst upgrade
B Riley Securities upgraded indie Semiconductor to a Buy rating and increased his Price Target by 58% to $13.
He also highlighted that the acquisition brought in complementary and non-overlapping customers from Japan and Korea like Honda, Hyundai, Nissan, Kia and Toyota, and design wins with 20 tier 1s and 400 car models, creating an excellent cross-sell opportunity.
A solid quarter
This fourth quarter print was a record one in terms of revenue and gross margin, and this is the second year in a row that indie doubled revenue. This strong performance needless to say beat expectations.
In the fourth quarter, this was the 7th consecutive quarter in which indie has at least met or beat revenue and gross margin expectations. In this quarter, revenue was up 74% year on year and up 10% sequentially to $33 million .
Gross profit was $17 million, bringing gross profit margin to 52.2%. Gross profit margin was up 590 basis points year on year from 46.3% in the prior year. Gross profit margin was up 180 basis points from the prior quarter, beating its guidance of 51%.
Since IPO in fourth quarter of 2020, indie managed to grow its revenue by five times and improve gross profit margin by 1,700 basis points.
In terms of operating costs, research and development costs came in at 24.9 million, up 54% year on year, as a result of an acceleration in product development. SG&A expenses came in at $7.4 million, down 6% year on year, as the company continued investments to extend indie's sales force. As a result, operating loss for the fourth quarter of 2022 came in at $15.1 million, beating the company's own guide.
Interestingly, indie also did a buyback of 1.1 million shares in the fourth quarter, resulting in total shares at the end of the period of about 151 million shares.
The resultant net loss and net loss per share was $14.4 million and $0.10 loss per share respectively.
A solid balance sheet
The company's cash continued to grow, with cash on the balance sheet increasing from $171 million in the third quarter to $322 million of cash in the balance sheet in the fourth quarter of 2022. This was a result of a $42 million capital raise from its Wuxi subsidiaries and $155 million net proceeds from its convertible debt offering.
I think that this cash on the balance sheet remains to be at a very healthy level, given that the company only used $15 million cash for operating activities, $4 million on capital expenditures and $7 million for repurchasing of shares.
Furthermore, indie launched a $50 million share and warrant repurchase program in the quarter.
Solid guidance
I was impressed by management's guidance.
I was not expecting indie to reach profitability this quickly and this accelerated my expectation for its path to profitability by one year.
With a growing product pipeline, acquisition of GEO semiconductor and several program ramps, indie expects that revenue growth will accelerate through 2023.
Management expects that in the first quarter, the company is able to scale up to a $160 million annualized revenue run rate, which included the part of revenue from GEO Semiconductor. In addition, management expects gross margins to reach 52% while the research and development expenses and SG&A expenses are expected to come in at around $29 million and $8 million respectively for the quarter. For the quarter, management expects $0.10 net loss in the first quarter of 2023.
That said, more importantly, management expects that with the synergies from the GEO Semiconductor deal, continued improvement in operating leverage, improvement in gross margin and accelerated revenue growth through 2023, indie expects that the company can reach profitability by the second half of 2023. This shows the management's strong execution capabilities, and they continue to execute well against their target of achieving its 60% gross margin and 30% operating margin in the longer term.
Sustainable hypergrowth business
It is important to note that even with the strong revenue growth seen in the fourth quarter, indie's strategic backlog continued to grow. It has substantially increased to $4.3 billion as of November 2022, up 65% from its $2.6 billion strategic backlog in 2021.
This large strategic backlog will help indie to sustain its hypergrowth mode as indie can translate these backlogs into program ramps and eventually bring significant revenue and free cash flow acceleration in the years to come.
In the quarter, management shared that its user experience portfolio with the largest North American automotive OEMs reached more than 200 million shipments in the quarter.
Today, indie's business supports many large automotive OEMs like Audi, BMW, BYD ( OTCPK:BYDDF ), Ford ( F ), General Motors ( GM ), Porsche ( OTCPK:POAHY ), Volkswagen ( OTCPK:VWAGY ), Stellantis ( STLA ), as well as the Japanese and Korean car brands listed above.
indie takes a sensor agnostic approach when it comes to Advanced Driver-Assistance System ("ADAS") opportunities. The company has a wide range of RADARs, LiDARs, ultrasound and computer vision products in its portfolio which will help to position indie well as an AutoTech semiconductor player that is able to ride this ADAS mega trend.
indie's acquisition of Analog Devices ( ADI ) radar division in 2021 and the successful integration of these acquired assets led to the company's largest design win ever for a top four automotive radar system supplier.
In addition, indie is competitive in the LiDAR market as a result of its Surya LiDAR SoC , which can provide a both cost effective and efficient LiDAR system, along with indie's very own differentiated TeraXion lasers .
Next, ultrasound is also needed in automotive as it is increasingly used for short range sensing applications like park assist systems. indie also has ultrasonic sensors competitive in the market, Sonosense and Echosense , and the company remains in the early stages of ramping up its ultrasound product range that is expected to support Hyundai's Smart Park .
Lastly, computer vision brings the main sensing function for future autonomous vehicles and there could be almost 20 cameras in the autonomous vehicles of tomorrow. These cameras could help with assisting lane changes, for the safety of the occupant, parking automation and enabling other different kinds of drive automation. The acquisition of GEO Semiconductor helped indie to bring new capabilities to cement its sensor agnostic approach, enabling it to bring a more complete, differentiated portfolio of products for ADAS applications.
Valuation
As earlier shared with the members of Outperforming the Market in the deep dive report on indie, my 1-year target price for the company is $17.74 . This implies an upside of 75% from current levels. This was based on my DCF model for indie and some of the key assumptions include a discount rate of 12% and the terminal P/E multiple of 9x.
I think that the risk reward perspective for indie remains positive given the accelerated path to profitability, it's very strong hypergrowth profile, solid management execution and a differentiated portfolio of AutoTech products and solutions.
Risks
Macroeconomic environment
While indie has been executing well and beating or meeting expectations every quarter, there is a risk that if the macroeconomic environment worsens, this could result in slower growth than expected. If the economy and business sentiment were to worsen, especially in the automotive space, this would certainly be a risk to management continuing to execute well and beating expectations.
Competition
At the end of the day, indie is still a rather small player in the AutoTech semiconductor industry. With other players that are rich in financial and other types of resources, these competitors could ramp up research and development and bring more intense competition to the market.
Conclusion
I think that indie's management has showed strong execution even amidst rather ambitious growth targets. The significant strategic backlog, continued beating of revenue and margin targets each quarter and acquiring a company that helps to complement its portfolio of products and customer base are just some of the examples that I have highlighted that management continues to show strong execution amidst an uncertain global market and difficult business environment.
Today, indie's business supports many large, global automotive OEMs, along with product ramps, launch of new products, will support its hypergrowth mode in the near-term. In the long-term, I see indie as a leader in AutoTech as it continues to innovate and focus on the mega trends that will drive the business forward.
My 1-year target price for the company is $17.74. This implies an upside of 75% from current levels.
For further details see:
indie Semiconductor: Emerging AutoTech Player Reaching Profitability While In Hypergrowth Stage