2023-04-06 09:53:02 ET
Summary
- Infineon management recently positively updated the outlook for next quarter and FY23 as performance in the Automotive and Industrial segments remains resilient.
- The acquisition of GaN systems will not make a meaningful difference in revenue or outlook, but it still is a strong move by management.
- As a result of these positive developments, I upgrade my outlook and calculated a price target of €50 per share.
Introduction
I reaffirm my strong buy rating on Infineon Technologies ( IFNNY ) and upgrade my projections after it positively updated its outlook for both 2Q23 and FY23 in a significant way, which is on top of already strong reported results back in January. Following the announcement, the share price increased by over 10% in a single week.
The excellent competitive positioning of the company makes it a winner in the semiconductor industry. Tailwinds from its automotive and industrial segments are driving better-than-expected results for this year and most likely also for the years after. This is driven by the strong market positions Infineon holds across several product segments. For example, Infineon holds an impressive 31% market share in the power semiconductor market, a very important product for many different industries. These industries include automotive, renewables, datacenter, and IoT (Internet of Things). And Infineon is not just a player in these industries, but it holds a significant market share in these fast-growing markets with it holding the largest market share in automotive semiconductors at 12.7%, and its power semiconductors being responsible for powering 50% of currently installed solar and wind energy systems. The broad product portfolio of Infineon covers all verticals of the energy conversion and usage business and the automotive semiconductor industry, which positions it well for impressive above-average growth in the coming years.
Add to this a strong management team that knows exactly where it needs to steer the company and which segments it needs to invest in to boost growth, and we end up with an excellent opportunity for investors. Yet, this does not seem to be entirely recognized by the market. Also, with additional funding from the European Union and the US government to increase domestic semi production, Infineon is poised to benefit as it plans to increase manufacturing capacity in both regions.
I last covered this underrated semiconductor giant back in January when I rated the company a strong buy (if you are unfamiliar with the company, I recommend reading that one first to get a better understanding of the fundamentals and product offering). Including its strong increase in share price last week, shares are now up close to 15% since. In this article, I will take you through the latest developments and update my estimates and view on the company accordingly.
Infineon upgrades its outlook, illustrating a resilient business environment
Infineon already reported excellent financial results back in January, when the company released results for its 1Q23. Total revenue was €3.95 billion, up 25% YoY. The gross margin improved from 41.5% back in 1Q22 to 47.2% in 1Q23, which resulted in a 57% higher EPS of €0.56. This illustrates a great start to the year for Infineon with solid growth continuing from last year, driven by all operating segments. Automotive and Industrial were the standouts with 35% and 31% growth YoY, respectively. The increase in Automotive was driven by a positive product mix and continued high demand, despite some macro issues still weighing on automotive production volumes. The number of cars produced worldwide in 2022 was still below the 2019 level, which is a positive sign for future automotive growth for Infineon. Ultimately, higher car production results in a higher demand for automotive semiconductors. But this segment sees even more tailwinds with OEMs also increasingly focusing on EVs which require at least twice as many semiconductors as traditional ICE cars. Infineon continues to act on these developments as well with recent design-win and innovation activity, including a new deal with Hyundai and new improved products for ADAS systems. Therefore, growth for this segment should remain strong and there is no immediate slowdown in sight.
For the Industrial power control segment, the decarbonization trend continues to be very important, with renewable energy and power infrastructure solutions showing a robust momentum. Management remains focused on this segment as a revenue driver. This is what was said during the earnings call :
Overall, we expect our industrial business to remain highly resilient, supported by our leading position in silicon carbide for applications such as photovoltaic inverters, energy storage systems, and the charging infrastructure for electric vehicles.
And the Power & Sensor Systems segment and Connected Secure Systems segment are also doing pretty well with revenue growth of 9% and 24%, respectively. Again, the result of strong demand. Yet, this strong demand is less visible in the company backlog with this one decreasing from €43 billion at the end of September to €38 billion by the end of December. This was the result of currency fluctuations and normalization in customer ordering patterns, reflecting generally better product availability as shortages are easing. While this trend is not a positive one for Infineon, this was to be expected and does not come as a surprise.
The overall quarter from Infineon was strong with multiple economic trends working in its favor, and this was also reflected in its outlook, which also looked strong. Yet, it upgraded this January outlook last week as both Automotive and Industrial performance has shown much more resilience. And this drove quite a meaningful change as well. Infineon management expected to report approximately €3.9 billion in revenue for 2Q23, combined with margins of around 25%. This was already a very decent result, driven by sequential growth in Automotive and Industrial. Now, with these two segments performing even better than anticipated by management already, Infineon now guides revenue of above €4 billion, combined with margins in the high twenties due to a better price mix and higher revenues.
What does this mean for FY23? Infineon previously guided for revenue of €15.5 billion (plus or minus €500 million), up 9% from FY22. This would result in a segment result margin of 25%, in line with the first quarter. But with its business now showing more resilience than anticipated, management now guides revenue to be meaningfully above its previous guidance, not giving exact numbers. The same goes for the operating margin which will increase correspondingly. We will need to add that Infineon reports in euros and that a weaker dollar negatively affects the reported numbers. Within the current estimates, Infineon counts on an exchange rate of $1.05 to the euro for the second half of the fiscal year. Still, the increased guidance looks excellent and requires analysts to revise their projections upwards in my view.
And there is more good news to report since my previous article as Infineon also announced the acquisition of GaN Systems for a price of $830 million, an all-cash transaction funded from existing liquidity. The company is a global leader in developing GaN-based solutions for power conversion and has over 200 employees. For clarification, GaN stands for Gallium Nitride, a compound semiconductor material used in the production of various electronic devices. Compared to traditional silicon-based semiconductors, GaN has several advantages, such as higher power density, higher efficiency, and size reductions, especially at higher switching frequencies.
GaN Systems is a leader in the fields of energy-efficient and CO 2-saving solutions which are crucial for a whole bunch of crucial technologies like mobile charging, data center power supplies, residential solar inverters, and onboard chargers for electric vehicles, all of which are seeing rapid growth in demand for these semiconductor solutions. As a result, the acquisition meaningfully adds to the power semiconductor offering from Infineon, strengthening its position in this industry and the GaN market in particular. This market is expected to grow at a 25.4% CAGR until 2030 as the advantages of this new technology are being adopted across industries. Therefore, I believe this is a good move by the management team. While the revenue contribution is not that meaningful, strengthening its GaN offering looks like a good one, and Infineon has the cash on hand to perform acquisitions like these.
Outlook & Valuation
While the GaN systems acquisition is not making a meaningful difference in the projections for the company, the updated outlook definitely does! This is also reflected in the analyst projections. At the time of my January article, analysts still guided for 12% revenue growth for FY23, but this has now been upgraded to almost 16% revenue growth for FY23.
So, what does this mean for my projections? Previously, I guided for a similar 12% revenue growth for FY23, followed by FY24 and FY25 revenue growth of 9% and 12%, respectively. For EPS, I expected slightly faster growth rates of 12% for FY23, 10% for FY24, and 12% for FY25, resulting in the following estimates:
- FY23 EPS of $2.17
- FY24 EPS of $2.39
- FY25 EPS of $2.67
Following the updates from management over the last several months, I have positively updated my outlook for Infineon and now arrive at the following financial expectations for the years until FY26.
(2Q23 projections: revenue of €4.3 billion and EPS of €0.62)
Shortly explaining these estimates, these now reflect the higher-than-expected growth rates from Infineon driven by resilience in both the Automotive and Industrial. EPS is expected to show much stronger growth driven by higher revenue and increased margins. For FY24, I expect Infineon to see somewhat slower growth as it needs to lap a strong FY23 result, and I expect a normalization of the supply chain and demand. For the following years, Infineon will keep benefitting from strong secular trends such as the transition to green energy, car electrification, ADAS, and datacenter expansion. This will drive meaningful growth in the future with Infineon holding strong market positions in all these industries.
Now, if we look at the valuation, based on my FY23 EPS estimate, shares are currently valued at a forward P/E of 15x. Considering the strong financial outlook, exposure to high-growth industries, excellent management team, and several strong additional tailwinds like semiconductor incentives from governments, this valuation seems way too cheap to me. Shares are currently valued at a 35% discount to its 5-year average P/E of 24.69x, and I believe they should be valued at a P/E of at least 20x which is still a conservative valuation for this semiconductor giant.
Therefore, based on my FY24 EPS estimate, I calculate a target price of €50 ($55) per share, leaving a 41% upside for investors. This is an upgrade from my earlier price target of €43 per share.
Conclusion
Infineon is an excellent company with exposure to several strong growing industries, offering a wide range of semiconductor solutions. The business is well-positioned for future growth and has a strong growth outlook. And the proposition to investors got even better when Infineon announced last week that it positively updated its outlook as it's Automotive and Industrial segments showed more resilience than previously anticipated. Add to this the good-looking acquisition of GaN systems to increase its GaN offering, and there is plenty of reason to be optimistic about this company.
Following this update from management, I also updated my projections on the company and now expect Infineon to report another impressive year of growth for the current fiscal year, ending in September.
As a result of this updated outlook, I upgrade my price target on the company from €43 to €50 ($55) per share and reaffirm my strong buy rating as the risk-reward profile looks incredibly attractive with Infineon holding strong market positions across several industries, has foundries across Europe and the US, and has an upside of 41% to my price target, based on FY24 EPS.
Infineon is an undervalued opportunity right now and I believe it is simply a matter of time before this gets acknowledged by the market.
For further details see:
Infineon: Still Massively Undervalued - Outlook Updated