2023-10-09 12:04:08 ET
Summary
- I'm uncertain about indie Semiconductor, Inc.'s future prospects.
- The company emphasizes growth over profitability, which raises concerns for me.
- Debt obligations and the potential impact of warrant repurchases contribute to my hesitation.
Investment Thesis
indie Semiconductor, Inc. (INDI) provides automotive semiconductors for Advanced Driver Assistance Systems ("ADAS").
This is a company that favors growth over profitable growth. Even though indie has a long-term outlook for a 60% gross profit margin with 30% operating margins, as you'll see, the company finds itself in the penalty box.
Meanwhile, I find myself neutral on INDI stock, as I struggle to get behind this company's vision. It's not that I doubt its narrative. Instead, I have certain reservations about its fundamentals.
Rapid Recall
As mentioned, indie Semiconductor specializes in automotive semiconductors for Advanced Driver Assistance Systems, positioning itself to gain market share and expand rapidly by offering tier 1 automakers a seamless interface with mobile platforms.
Their primary focus is on sensors and in-cabin experiences, primarily for electric vehicles, and eventually, autonomous vehicles. Importantly, indie Semiconductor remains technology-agnostic, providing flexibility, and with the rise of next-generation vehicles, it believes its diverse customer base is a core advantage.
The company has a very alluring narrative. But at the same time, I've been skeptical of this company for a while. In fact, I believe that among SA analysts, I've been the only analyst without a buy a rating (or higher), see below.
SA Analysis
At the time, I wrote :
[...] given the lackluster progress in underlying profitability, investors are now starting to question the likelihood that, in fact, INDI is able to reach positive profitability in Q3 2023.
And what's happened? indie's guidance for Q3 doesn't point towards profitability. But I get ahead of myself.
Let me put this forth clearly, with the stock down 30% since those words were penned, have I changed my mind about INDI? Do I believe the stock offers better value now ?
SA Premium
I don't believe that this is the time to average down into this stock. Here's why.
Revenue Growth Rates Are the Story
This is a growth story, pure and simple. Management is still playing the playbook that worked incredibly well in the low-interest environment. The story that investors were rewarding, was one of growth at any cost.
But today, investors are not as compelled towards a good growth story. They prefer profitable growth. Growth, for growth's sake, isn't getting rewarded anywhere near as much as it was when interest rates were abnormally low.
Everything is now contingent on what's happening on the bottom line, and that's where we head next.
Profitability Brought into Question
Back in Q1 2023 , indie's management put out the following guidance,
[...] we are on track to reach profitability in the second half of this year on our way to achieving our target operating model driven by sustained topline growth, further gross margin expansion and operating expense leverage.
The message was clear, that indie will reach profitability in the second half of 2023. However, after Q2 2023 the wording changes and the goalposts changed. Now, indie's guidance points towards Q3 delivering a ''narrower operating loss,'' before reaching ''non-GAAP operating income in the fourth quarter of this year.''
The problem here is one of having to wait a little longer. Essentially, investors are asked to be patient. Just wait a little longer. And investors are never patient at the best of times. But when a company changes its goalposts, investors build skepticism. Some buffer.
Essentially, investors ask for a wider margin of safety and are willing to pay smaller multiples for the same stock.
And that's precisely what's happening with INDI, see below.
A few months ago, investors were willing to pay 9x forward sales for this stock. Today, investors are willing to pay around half as much.
And the problem then complicates further, because once a stock becomes labeled as a ''show me'' story, investors lose patience, and whatever the company promises in terms of an alluring narrative is viewed with a different lens.
Furthermore, indie's balance sheet only holds around $20 million of net cash, as there are about $160 million of debt obligations against that cash.
INDI Q2 2023
And on top of that, the company is attempting to buy back its warrants. There are just over 27 million warrants outstanding . And if they don't get successfully repurchased within the next 10 days, unless there's a further extension, this would lead to its total shares outstanding increasing by over 15%.
In practice, that would mean its market cap would increase to around $1.1 billion versus the roughly $990 million it presently trades at.
That's not a huge increase, but when a company is already in the penalty box as a show-me company, everything suddenly becomes more scrutinized.
The Bottom Line
I find myself uncertain regarding indie Semiconductor.
While the company specializes in automotive semiconductors for Advanced Driver Assistance Systems and envisions substantial growth, I have reservations about its fundamentals.
Despite a compelling narrative and the company's attempt to reach profitability, recent changes in guidance and shifting market sentiment have cast doubt on its prospects.
The focus on revenue growth over profitable growth, coupled with debt obligations and warrant repurchase concerns, has left me hesitant to embrace INDI as a stock worth investing in at this moment.
The evolving dynamics in the market make it challenging to determine whether indie Semiconductor, Inc. is really worth throwing hard-earned capital at.
For further details see:
indie Semiconductor's Shifting Guidance