2023-12-13 22:29:57 ET
Summary
- indie Semiconductor reported strong Q3 2023 results and upgraded its guidance for Q4 and the full year.
- The Company's strategic backlog leapfrogged to $6.3Bn from $4.3Bn leading to forecasted revenue of $1Bn for 2028.
- INDI is currently growing revenues at 100% and should grow at 37% for the next 5 years.
- indie's P/S ratio of only 4x 2024 revenues is a compelling bargain.
- While profitability is a long way off, there is enough operating leverage and growth in margins to break even by 2026 and reach GAAP profitability by 2028.
indie Semiconductor ( INDI ) declared great results last month and upgraded guidance for Q4-2023 and the full year. More importantly, it also guided to $1Bn in revenues for 2028, confirming phenomenal growth of 37% for the next 5 years. For me this was the clincher; I continue to accumulate on every dip and am re-iterating my buy recommendation. I had first recommended indie in Sep 2023, around $6.70, after which the stock sank on interest rate increases and the fear of "higher rates for longer" to a low of $4.67. Along the way, I took the drops as buying opportunities, adding on several occasions -- my average price is now below $6.
I'm briefly summarizing indie's strengths from my first article - all of these remain strong reasons to continue buying indie.
- Huge competitive advantages of providing agnostic and holistic solutions to the ADAS segment of the auto-tech industry.
- A decade of secular growth ahead for the auto-tech industry, with plenty of opportunities.
- Indie is run by a solid team of industry veterans with decades of production experience and deep roots in the auto-tech industry - working and partnering with OEMs from the blueprint stage is a huge competitive advantage.
- Barrier to entry - the auto-tech supply business is a difficult and often torturous road; projects take years to implement, the testing process is extremely rigorous, and several iterations are completed before products hit the road. Sometimes the time to market is 5-7 years and rollouts are continuously pushed out. This product development and time to market life cycle is a huge barrier to entry, and meeting these high-quality standards is a strong testimonial to indie's prowess and sustainability in this market. Product wins are sustainable recurring revenues with a SaaS-like land and expand strategy, with customers buying more than one product.
- indie is a great combination of having the tech chops of over 400 patents and decades of experience in (painful and arduous) auto production.
An excellent quarter and guidance
indie had updated its Q3 revenue forecast in October to $60Mn, and eventually did even better with 60.5Mn, more than double Q3-2022's revenues of $30Mn. GAAP EPS came in at -$0.12, with losses narrowing substantially from last year's -$0.31. Clearly, better gross margins and operating leverage help the bottom line.
Adjusted Gross Margins sailed through at 52.7%, 226 basis points higher YoY. indie also guided to Q4 revenues of $70-$75Mn and reiterated plans to double revenue in 2023. Based on mid-point guidance that works out to $226Mn, a whopping gain of 104% over 2022. However, the clincher was the strategic backlog rose to $6.3Bn from $4.3Bn in 2022 and $2.6Bn in 2021. A 49% raise on top of a 105% raise.
CEO Don McClymont had this to say on the earnings call. Emphasis mine.
The $2 billion of incremental growth was led by Computer Vision supported by our acquisition of GEO Semiconductor earlier this year, together with post integration wins including Bosch, which enabled a leading North American OEM as well as Toyota. Combined with our radar wins, which should extend well beyond the capped 10 year lifetime, the ADAS contribution alone is roughly $4.6 billion in total with the balance heavily in User Experience followed by emerging Electrification products.
Importantly, all of these wins set the stage for indie to exceed $1 billion in annual revenue by 2028.
This is hugely important within the auto tech sector where sales cycles stretch years and not months, and having such concrete revenue visibility through 2028 portends extremely well for indie's future. $1Bn in revenue growth equates to over 37% in annual revenue CAGR from 2023!
Updated financial forecast
Based on the CEO's updated revenue forecast, I've updated indie's financials as under:
indie financial forecast (indie, Seeking Alpha, Fountainhead)
All of these are GAAP forecasts in an effort to be conservative.
As expected, indie should grow at 104% in 2023, 57% on a higher base in 2024, and 44% in 2025, eventually reaching $1Bn in 2028 as forecasted by management. In 2028, revenue will grow at 24%, which I believe may turn out to be conservative, should the strategic backlog increase.
Nonetheless, over a 5-year period, this translates to a massive 37% CAGR from $226Mn to $1.1Bn in 2028.
I'm forecasting stronger growth rates for gross and operating profits as scale and operating leverage kick in. With gross margins increasing to 47% in 2024, gross profits should expand by 72% in 2024. I expect operating profits to expand substantially only in 2025, once R&D expenses start settling down to double digit growth of 19% and 16%, from 32% in 2023. It would be a mistake to reduce R&D further - this company has over 400 patents and R&D is their lifeblood for getting lucrative and sustainable long-term auto manufacturing contracts.
I expect indie to break even on a GAAP basis only in 2026, as operating profits grow by 102% that year on the back of 34% revenue and 48% gross profit growth. As we see below, gross margins should slowly inch up to the 50% mark peaking at 57% in 2028. With increased operating leverage indie should end 2028 with 14% operating profit margins. In my earlier article I had shown close competitor, the $940Mn annual revenue, Monolithic Power ( MPWR ) achieving an EBITDA margin of 25%, so I do believe 14% is achievable at $1.1Bn in revenues.
Expanding margins are key to profitability. indie has called for longer-term adjusted gross margins of 60% and operating margins of 30%. On a GAAP basis, I believe indie will expand slowly from 42% this year to 57% by 2028. Its operating margins will also improve from a negative 61% in 2023 to breaking even in 2026 and expanding to 14% in 2028 when it hits the $1Bn revenue mark. Anything faster will be a welcome surprise.
indie operating margins (indie, Seeking Alpha, Fountainhead)
indie will need to get profitable in the next 3-5 years, I don't believe the markets will be as forgiving when revenue growth starts reducing to 25-35% as expected. Further, indie has not been a cash flow generator even with high stock-based compensation, mainly because it's been using cash and stock for its acquisitions.
Risks and challenges
Dilution, dilution, dilution! indie's stock count rose from 70Mn in 2021 to 147Mn at the end of Q3-2023! With $36Mn in SBC for the same 9 months, or 20% of total expenses, clearly, the trend is not helping shareholders. Besides SBC, indie also uses stock for acquisitions. In the first 9 months of 2023, it issued around 19Mn shares for its 3 acquisitions. To be sure, the acquisitions are absolutely strategic and essential for growth and the GEO semiconductor acquisition was key in achieving the strategic backlog growth of $2Bn this year. To be a ubiquitous, agnostic, and holistic ADAS provider, which is its key competitive advantage, it needs to fill product gaps and acquire IP (intellectual property), but it will become an expensive strategy and eventually reduce its multiples and valuation if left unchecked. Besides the existing high share count of 147Mn, the potential dilutive pile, which is excluded from the share count is also quite high at 87.5Mn shares as shown below in its most recent 10-Q.
Profitability and Valuation
There is no valuation from an earnings point of view, this is strictly a revenue growth story till indie breaks even.
Assuming my forecasts are correct, and indie gets to 14% in operating profit margins in 2028, it could earn $155Mn on a revenue base of $1.1Bn, and with small interest payments earn a net income of $140Mn. Now comes the tricky part - forecasting the share count! Let's assume the dilution has stemmed to about 10% a year - and the current 147Mn shares increase to about 237 Mn shares - that's an EPS of $140Mn/237Mn shares or just $0.60 , which at best could likely sell at 30X or $18 per share. In 2028, forecasted sales growth has likely slowed to about 25% per year, so profitability and earnings multiples matter equally. From the current $7.7 share price to $18 per share is a CAGR of 19% over 5 years. We're in small cap, startup territory here and given the volatility -- the stock dropped over 50% from over $10 in June to $4.7 in just 4 months, indie's small size, and the short interest of 16%, the reward of 19% may not be enough given the risks. This is likely to be a very bumpy ride, and an earnings or revenue miss would be costly.
Buying for the long term
Notwithstanding the two major risks listed above, and the need for more organic growth, I strongly believe in the long-term story. To summarize, management is excellent, products and pipeline are very strong, the industry has a lot going for it and indie's competitive advantages of strong tech and production experience are very compelling reasons to stay invested and use the volatility to scoop more shares on declines. Clearly the promise of $1Bn in revenue in 5 years at 37% growth is at a forward P/S of 4, shrinking to 1.3 by 2028 is very, very attractive. The 10-year dropped to 4.06% this evening from 4.25% on the dovish December Fed meeting. Lower interest rates will also help valuations.
For further details see:
indie Semiconductor: Strong Quarterly Results And Guidance; Reiterating Buy