indie Semiconductor: Small AutoTech Player, Multiple Growth Tailwinds (NASDAQ:INDI)

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I have been on the hunt for small cap companies which could be potential multi-bagger in the decade to come and I think that I may be onto something with AutoTech semiconductor company indie Semiconductor (NASDAQ:INDIA).

Investment thesis

I think there are many reasons to like indie Semiconductor. The company will continue to gain share in the AutoTech semiconductor space as it continues to bring innovative products into the market, while there are strong industry tailwinds like the electrification and autonomous vehicles revolution that will bring content spend and volumes up. I also like that the co-founders of the company are still in the company and involved in the day-to-day running of the company. Lastly, it has a strong strategic backlog that provides visibility into the future growth potential of the company and this backlog will be updated in the next quarter, bringing an additional near-term catalyst. Last but not least, with the unfavorable sentiment around unprofitable companies, indie Semiconductor is one of the few fast-growing companies with strong growth potential as well as a sight on near-term profitability.

Overview

indie Semiconductor focuses on providing its customers with the automotive semiconductors as well as software needed for various applications, including Advanced Driver Assistance Systems (“ADAS”), User Experience and Electrification.

The company mainly focuses on edge sensors that helps to improve the core safety systems for the next generation of vehicles like autonomous vehicles as well as electric vehicles, and to enhance the customer’s in-vehicle experience.

The main go-to-market strategy of indie Semiconductor is to collaborate with its key customers as well as partner more than 10 Tier 1s for product development. The company is an approved vendor to Tier 1 automotive suppliers, and it has already shipped a cumulative 140 million semiconductor products since the beginning. indie Semiconductor has a differentiated portfolio that integrates the team’s strong expertise in technology as well as skills in designing cutting edge capabilities to bring able innovative automotive products and software to its customers. In addition, the company meets tough quality standards of more than 20 international automotive players that are its customers today, and with a global presence, the company also provides its innovative semiconductor products and software solutions to customers from all over the world.

Run by founders

I like companies that are run by founders as these companies tend to have better long-term strategy and increased motivation to drive shareholder value. Out of the 5 executive officers in the company, 3 of them are the co-founders of indie Semiconductor. Donald McClymont serves as the CEO, Dr. Ichiro Aoki serves as the President and Dr. Scott Kee serves as the Chief Technology Officer, and all 3 of them were the co-founders of indie Semiconductor. Similarly, before founding indie Semiconductor, all 3 of them were from Axiom Microdevices, which was later acquired by Skyworks Solutions (SWKS).

Expanding addressable markets

indie Semiconductor has a growing and expanding addressable market that is growing at a 13% CAGR. Its 3 main addressable markets that it serves are Advanced Driver Assistance Systems (“ADAS”), User Experience and Electrification.

Total addressable market for indie Semiconductor

Total addressable market for indie Semiconductor (indie Semiconductor IR)

In addition, the silicon content in each vehicle is also increasing rapidly given the increasing electrification and improving user experience in the vehicle. As a result, it is expected that the $700 per vehicle spend on silicon content will increase to $1100 per vehicle spend on silicon content in the near term, with an ultimate $7000 per vehicle spend in the longer term on more luxury vehicles.

Huge strategic backlog positioned for growth

As of last fall, the company disclosed that they have a strategic backlog of $2.6 billion. For perspective, in the prior 2Q22 results, indie Semiconductor generated $26 million in revenues. This backlog represents approximately 100 times that of 2Q22’s revenues.

In addition, we have to take into account the fact that the strategic backlog was from 1 year ago and in the upcoming 3Q22 results, I would expect management to disclose the strategic backlog figures for the year. In my view, the increase will be significant given the larger sales channels that the company has created, and the design wins that management has mentioned in the recent earnings calls. As such, I think that the announcement of its newest strategic backlog numbers will be a key catalyst for the stock in the near term.

For example, in Japan and Korea, indie Semiconductor recently developed a strategic presence and had major design wins with large Korean and Japanese auto manufacturers like Honda (HMC) and Hyundai Kia.

Solid financials with profitability in sight

indie Semiconductor has a strong growth profile while also having a focus on the bottom line. In the most recent quarter, indie Semiconductor revenue grew by 181% year on year, while posting gross margins of 48.6%, which improved by 650 basis points year on year.

Management remains confident that their current progress will enable the company to reach profitability in the second half of 2023. The eventual goal in 2025 is for the company to reach 60% gross margins and 30% operating margins. This implies significant improvement in margin expansion and cost structure improvement as the company continues to grow quickly.

To achieve the profitability target that management has set, the company’s revenues need to double from 3Q22 until the next year. Management remains confident that they are able to execute according to their plan as they have already doubled revenues twice and with the strong backlog visibility, they are confident at 2023 revenues reaching the required levels.

Overall, with the strong pipeline of design wins, the company has shown that they have the ability to scale and expand quickly while improving operating leverage to ensure that gross margins continue to expand with increased revenue growth.

competition

There is no doubt that the semiconductor industry is highly competitive, especially so for automotive applications given the higher growth rates. That said, management commented that the consolidation in the semiconductor industry has resulted in a perfect opportunity for indie Semiconductor as the company currently has fewer viable competitors fighting for market share and the consolidated market creates opportunities for the company as customers look to diversify supply sources.

Some of the semiconductor competitors that focus on automotive applications are companies like Infineon (OTCQX:IFNNY), ​​Monolithic Power Systems (MPWR) and NXP Semiconductors (NXPI), amongst others.

The main risk for indie Semiconductor is the sheer number of financial resources these competitors have compared to the company and some of these competitors have a more diversified and wider range of products given their wider end market focus.

That said, indie Semiconductor is well positioned to take share from the market given their strong technical and design expertise as well as its solid list of Tier 1 automotive suppliers.

Valuation

Given that the company currently does not generate any earnings yet, I use an equal weight of the DCF method and EV/Sales method to derive a 1-year target price for indie Semiconductor.

indie Semiconductor currently trades at 4x FY2023F revenues and 2.5x FY2024F revenues. I expect that the company will generate positive EPS by FY2024, with current prices reflecting a 15x FY2024F P/E. I expect top-line revenue growth of 70% on average from FY2023 to FY2025F, with earnings growth to accelerate in FY2024F as the company turns profitable. The assumptions I made for the revenue forecasts are based on the addressable market growth as well as current backlog numbers. These are conservative in my view as I have not yet taken into account any outperformance by indie Semiconductor in the form of market share gains. I assume a 1-year forward EV/Sales of 7x given the strong revenue CAGR expected in the next 3 years, while assuming a terminal P/E multiple of 20x and discount rate of 12%. Given that for peers growing at a 70% CAGR in the next 3 years are trading at around 7x EV/Sales, I think that the multiple is fair given the fundamentals about indie Semiconductor discussed earlier. My 1-year target price for indie Semiconductor is $14.80, implying 93% upside from current levels.

risks

competition

As a small player in the AutoTech semiconductor industry, it is up against competitors with large financial resources that could easily invest more into research and development compared to indie Semiconductor, which would erode the company’s competitive advantage and result in potential market share losses. As a result, competition is the largest risk to the investment thesis as future growth will hinge on whether the company is able to innovate and stay relevant in a fast-changing semiconductor industry. If this risk materializes, the company may face slower growth or even declining revenues and a weaker margin profile.

Capital risks

While I am of the opinion that the company has sufficient liquidity and can meet its current capital requirements, it may seek to raise additional capital to take advantage of opportunities to acquire new businesses that complement its current business or to expand into new lines of business. There is a risk that the efforts to raise this additional capital are dilutive to shareholders.

Cyclical nature of semiconductor industry

As a result of the nature of the semiconductor industry, it tends to be highly cyclical. This is especially so during periods of economic weakness, where the semiconductor industry will experience a downturn, leading to lower demand, increasing inventory levels, oversupply and a deterioration in the industry dynamics as industry players may have to reduce selling prices. This will no doubt affect indie Semiconductor given that the company is in the industry and as such, the cyclical nature of the industry brings about potential downside risks.

Automotive industry risk

Since the company is a pureplay on automotive applications for the semiconductor industry, this brings about a risk that if the automotive industry were to slow down materially, the company may be affected adversely given the concentration in the sector.

conclusion

indie Semiconductor is well positioned for strong growth in the future as it is gaining share in the AutoTech semiconductor space, with strong tailwinds from the electrification and autonomous vehicles revolution, driving both volume and content spend up. The company is managed by executives who are co-founders of the company and have been running the company since day 1. The company has a large strategic backlog that was last updated one year ago and will serve as a catalyst in the next quarter results. Lastly, it is one of the rare AutoTech semiconductor players with strong visibility on both growth and near-term profitability. My 1-year target price for indie Semiconductor is $14.80, implying 93% upside from current levels.

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