Indie Semiconductor: Artificial Intelligence Processing Is A Game Changer (NASDAQ:INDI)

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Funding Thesis

I’m bullish on indie Semiconductor, Inc. (NASDAQ:INDI) as a result of I count on profitable collaboration with Expedera, along with effectivity enhancements and efforts at enhancing scalability and enhancing energy consumption. As well as, I assumed additional Adjusted EBITDA development from collaborations with High Tier 1 automotive suppliers, additional enchancment of the backlog of $6.3 billion, and inorganic development. I valued the corporate between $8 and $9 per share. I obtained these values by utilizing discounted money circulate evaluation, a comparability with earlier transactions, and acquisitions made by Indie.

Indie Semiconductors – Overview

Indie Semiconductors presents automotive semiconductors and software program options centered on purposes like ADAS, in-vehicle leisure, parking help, cameras for vehicle detection, and other innovative tools.

Indie started as a project between engineers with an extended profession within the {industry} in 2007, changing into the primary producers of CMOS sign amplification techniques for cellular gadgets, inserting 250 million of their merchandise into the market, previous to coming into the record of public firms in 2015. Most buyers on the market could know the corporate for its know-how for in-cabin expertise and electrification efforts.

Indie shouldn’t be solely interesting as a result of it operates in a rising market, inorganic development additionally seems to be one in every of Indie’s specialties. The corporate has carried out a sequence of acquisitions, together with Symbeo GmbH throughout 2022 and GEO Semiconductor. Likewise, Indie maintained its development technique by means of acquisitions throughout 2023 and 2024, together with Silicon Radar and Exalos AG. The latest acquisition is that of Kinetic Applied sciences, carried out throughout January 2024, which included the whole enterprise, together with the personnel and mental property of the corporate.

The corporate studies a major variety of people with experience within the acquisition of targets. Ms. Parekh, who sits within the Board of Administrators, brings experience acquired in giant funding banks. With this particular person and others within the Board of Administrators, I might count on extra inorganic development.

Ms. Parekh has greater than 25 years of worldwide capital markets and operational expertise within the excessive development Know-how, Media, Telecommunications and Client Web industries, each as an advisor and senior govt. Previous to working at HPE, Ms. Parekh held a number of senior management roles at international funding banks, together with Barclays Capital, Goldman Sachs and Jefferies. There she suggested non-public and public firms on a wide range of transactions together with M&A, capital structuring, joint ventures, non-public placement, in addition to on enterprise improvement and strategic development initiatives on the board stage. Supply: Board Of Directors

With income development, administration just lately introduced {that a} richer product combine and new product pipeline may broaden the gross margin and slim working losses. With this remark in my thoughts, I made a decision to execute some due diligence concerning the inventory and its present valuation.

On the identical time, we’re planning on gross margin enlargement to the 51 to 52 p.c vary from a richer product combine, flat bills and, in flip, a narrower working loss on a sequential foundation. Supply: Quarterly Press Release

Primarily based on the energy of our new product pipeline, we plan to return to excessive development mode within the again half of this yr and to renew our industry-leading development trajectory into 2025 and past. Supply: Quarterly Press Launch

R&D Bills May Lead To Constructive 2025 Web Earnings

I just lately appreciated fairly a bit that Indie continues to report will increase within the R&D bills. We’re speaking about double-digit R&D bills development reported within the final quarter. In my expertise, firms investing in R&D normally report headcount development and web gross sales development. I see these efforts paying off for the corporate in 2025. In my DCF mannequin, I assumed that 2025 unlevered FCF might be constructive. Q1 2025 EPS estimates from In search of Alpha are also positive.

Within the final report, Indie Semiconductor famous that it’s attempting to broaden its product improvement actions, which is like music for my ears.

The rise of $13.0 million or 36% was primarily attributable to a $3.7 million improve in personnel prices to help our steady development in analysis and improvement wants and a $10.7 million improve in share-based compensation expense. Supply: 10-Q

We count on analysis and improvement expense to proceed to extend as we proceed to develop our headcount organically to help expanded product improvement actions. Supply: 10-Q

I can not actually undergo all of the improvements just lately introduced. Nonetheless, within the final presentation to buyers, administration famous enhancements in in-cabin monitoring, backup cameras, and mirror replacements.

With regard to different new improvements, in Could 2024, the corporate introduced a new investment in Expedera. The brand new settlement may carry scalable Neural Processing Unit semiconductor mental property, which may carry a brand new era of extra environment friendly AI processors.

By means of this partnership, indie will leverage Expedera’s NPU IP to develop revolutionary next-generation ADAS options with embedded synthetic intelligence processing capabilities. Supply: Indiesemi

The brand new investments in R&D may carry new providers like picture sign processing, and digital sign processing. With these new instruments, for my part, the corporate could improve the worth of their techniques, or supply elective improvements. Apart from, new instruments could carry new product demand from extra shoppers.

William N. Leonard revealed a number of papers noting that R&D spending pertains to development charges of gross sales. The creator notes that the relation seems two years after R&D spending. Therefore, I count on that the new investment in Expedera may carry web gross sales development in 2026 or 2027.

Analysis depth, measured by firm R&D spending, relates considerably to development charges of gross sales, belongings, web revenue, and different variables of sixteen industries performing almost all manufacturing exercise. The relation seems two years after R&D spending and will increase thereafter. Analysis depth, measured by manpower ratios, relates much less successfully. When analysis depth ratios embody federal R&D funds, correlations with development charges fall, normally beneath significance. Supply: Research and Development in Industrial Growth

Additionally it is price noting that ADAS purposes supplied may turn out to be extra scalable, in order that the NPU processes and reacts to plenty of data together with site visitors lights, signal recognition, or the actions of pedestrians.

Apart from, I believe that enhancing energy consumption may be fairly helpful for the corporate’s high line of the revenue assertion. Basically, something that contributes to increasing the EV’s battery life will likely be welcomed by market members.

My valuation course of incorporates assumptions with respect to the collaboration with Expedera, will increase in R&D bills, and profitable product improvement. I additionally assumed that enhancements in energy consumption and scalability will likely be a number of the income development and Adjusted EBITDA development catalysts.

Goal Market Rising At 13% CAGR Will Have A Useful Impact On Web Gross sales Progress

The corporate is anticipated to learn from the expansion within the automotive semiconductor market, which is rising at near 11%. Allied Market Analysis, as an example, reports that the worldwide automotive semiconductor market measurement may develop at a CAGR of 10.1% from 2023 to 2032.

Indie additionally made an estimate about its served addressable market, which may develop at near 13% from 2022 to 2027. I believe that Indie’s web gross sales development might not be removed from the expansion in these goal markets.

INDI Outperforms Its Friends Thanks To Good Relationships With High Tier 1 Automotive Suppliers

I might additionally count on vital web gross sales development due to the corporate’s relationships with High Tier 1 automotive suppliers. In my opinion, these relationships may clarify why Indie appears to out-execute and outperform its {industry} peer group in 2024. As well as, the strategic backlog, which was valued at near $6.3 billion in 2023, offers invaluable perception about future web gross sales development.

Firm’s Financials And Stability Sheet: Goodwill Progress, And R&D

INDI’s whole income TTM is near $235 million. In 2023, the corporate reported income of $223 million. Income development is kind of spectacular. In 2019, income was near $22 million.

Based on the tool supplied by In search of Alpha, income development YoY is 81%, and ahead income development is 54%. Income development is considerably increased than that reported by different firms in the identical sector. I studied these monetary figures to design my discounted money circulate evaluation.

The steadiness sheet reveals a big improve within the whole amount of money, from $7 million in 2019, to $138 million within the final report. Complete present belongings additionally elevated from $16 million in 2019 to $263 million in 2024. In my opinion, buyers are giving money to INDI, which explains the latest improve in liquidity. In my opinion, buyers pump in extra cash as a result of they count on that INDI’s web revenue may turn out to be constructive from 2025. As quickly as market members see the primary constructive EPS, I believe that the demand for the inventory may improve. 2025 EPS estimate is equal to $0.12.

The whole quantity of belongings elevated from $21 million in 2019 to greater than $803 million in 2024. Goodwill additionally elevated considerably on account of latest acquisitions. Within the final report, goodwill was near $290 million. It’s price noting the latest acquisition of Kinetic Applied sciences, LLC, which may improve motor management electrical effectivity within the coming years. Given previous acquisitions, and profitable integration I might count on extra inorganic development sooner or later. I believe that INDI is aware of learn how to purchase different rivals.

Within the final report, whole present liabilities is the same as $151 million, and whole liabilities is $342 million. The ratio asset/legal responsibility is 2.3x, so I believe that that firm’s monetary scenario is steady. Lengthy-term debt is the same as $157 million. In my opinion, administration may obtain extra debt financing sooner or later. If 2025 web revenue turns into constructive bankers could supply higher financing situations to INDI.

Valuation Utilizing Earlier Acquisitions Made By Indie Semiconductor

I reviewed the acquisitions made by Indie Semiconductor. I studied the variety of staff that these firms had and the cost made. The record of targets contains Kinetic, GEO, Silicon Radar, and Exalos. The data was obtained from the final annual report, and I used the database offered by Zoominfo. The next is details about the outcomes that I obtained.

The median acquisition/staff ratio is $1.5 million per worker. Based on Zoominfo, Indie Semiconductor studies round 900 staff. Therefore, the implied valuation could be $8.23 per share. The share rely I used is the same as 168 million.

The variety of shares excellent of the registrant’s Class A and Class V widespread inventory as of Could 7, 2024 was 168,168,203 (excluding 1,725,000 Class A shares held in escrow and 26,064 Class A shares topic to restricted inventory awards) and 18,594,328, respectively. Supply: 10-Q

I additionally compiled a lot of acquisitions executed from 2013 to 2021 within the {industry}. Utilizing the ratio of acquisition contribution/income, I obtained a median ratio of three.5x. I used 2025 web gross sales of $408 million, which is an assumption I made based mostly on expectations supplied by Indie and my very own judgment. SA’s estimates are close to mine. Multiplying 2025 web gross sales*Median I obtained a complete valuation of $1.43 billion. Dividing by the share rely, I obtained an implied truthful worth of $8.5 per share.

Valuation – Discounted Money Movement Evaluation

I carried out a reduced money circulate evaluation of Indie Semiconductor to calculate the estimated current worth of the standalone unlevered, after-tax free money flows that Indie forecasted. I calculated terminal values for the corporate by making use of perpetuity development charges of 4%. My numbers are based mostly on my skilled judgment and expertise.

My assumptions about Adjusted EBITDA development, D&A, taxes, capital expenditures, and adjustments in working capital are related to each numbers delivered by INDI. I additionally assumed that good relationships with high Tier 1 automotive suppliers, the expansion within the automotive semiconductor market, and the settlement with Expedera may carry enterprise development.

The corporate reported 101% YoY development in 2023 due to Tier 1, and OEM validation, and enhancing product combine. In 2022, income development was near 129% YoY, and in 2021 whole income development was 114%.

I believe that income development will likely be decrease than 101% YoY from 2025 to 2033. Based on consultants, the worldwide automotive semiconductor market measurement may develop at a CAGR of 10.1% from 2023 to 2032. Apart from, Indie famous in a latest presentation that its served addressable market may develop at near 13% from 2022 to 2027. So, I assumed 13% gross sales development from 2026 to 2031, and 9% gross sales development in 2032, and 2033.

Underneath these situations, I foresee web gross sales development from 2025 to 2033 in addition to D&A development, and capex improve. Median Adjusted EBITDA development from 2027 to 2033 could be near 7%. As well as, the median unlevered FCF development from 2026 to 2033 could be 11%, and the median Adjusted EBITDA development could be 11%. The Adjusted EBITDA Margin and the unlevered FCF margin are additionally in line with that of competitors.

My numbers are a bit decrease than the expectations from different analysts. I assumed 2025 EBITDA of -$1 million, and 2025 unlevered FCF of -$33 million.

With data from S&P Global Market Intelligence, a complete of 8 analysts delivered expectations that embody constructive EBITDA in 2025 near $62 million, and 2026 EBITDA of $97 million. They’re anticipating positive EBITDA in 2025, and 2026. I don’t assume that they may revise the latest reported EBITDA for the final quarter, which was the lowest it has ever been. I attempted to be a bit extra conservative than these analysts.

The money flows and terminal values had been discounted utilizing a reduction fee of 8%, based mostly on an estimate of Indie Semiconductor’s weighted common price of capital. I calculated the implied fairness of Indie Semiconductor by subtracting the net debt from the implied enterprise worth. Dividing the end result by 168 million shares, I obtained the implied per share fairness worth of $8-$9 per share.

There Are Many Opponents Out There, And The Trade Consolidates

The semiconductor {industry} is characterised by excessive technological innovation and fast transformations in relation to the usefulness of merchandise and costs out there. In reality, costs for the primary merchandise have decreased lately as a common pattern. This characteristic and the declines in demand are components that immediately have an effect on the event of the enterprise.

The aggressive capability throughout the market is conditioned on the one hand by the provision of sources for the event and analysis, and alternatively by adaptation to buyer calls for.

Moreover, at current, the market pattern is transferring in the direction of the consolidation of the primary members, which might translate into decrease acquisition and declining circulation of the merchandise of small firms.

If we use Indie’s annual studies, the primary rivals at the moment for this firm are Infineon, Monolithic Energy Programs, NXP, Renesas, and ST Microelectronics. These are main firms with worldwide attain which have superior sources for the analysis and distribution of their merchandise.

Having a look on the markets on the whole, we should additionally add Mobileye, LeddarTech, Helm, Uhnder, Phantom, RealTime Robotics, Silicon Mobility, and AutoBrains throughout the record of rivals for Indie, bearing in mind all product traces and never solely the specialised line of the historic core of the corporate.

Dangers From Third-Social gathering Producers

Indie relies on outsourced producers to finish its manufacturing phases, and the manufacturing processes on this sense are extremely delicate, wherein any impurity within the process can result in the obsolescence of the product, with the addition that they’re tough to determine of their early phases. The corporate has already suffered delays and damaging situations from issues in manufacturing and the efficiency of its suppliers.

Moreover, the transformation of its merchandise as a result of wants of its clients leads in some instances to the readjustment of producing situations, and in these adjustments, there’s a danger that the efficiency margins lower considerably. On this section, we should additionally take into account the provision of uncooked supplies and the lack to exchange one of many important ones as a result of low provide out there, which, though it isn’t a direct danger arising from its producers, is likely one of the components which might complicate this course of when it comes to assembly deadlines and efficiency margins.

Dangers From Shopper Focus

Though the focus of gross sales in Aptiv, its major shopper, has decreased considerably from 2021 to 2023, in my opinion, this example continues to characterize a danger issue for Indie. If Aptiv decides to cease working with the corporate whole web gross sales will fall sharply.

Together with this, Indie’s major outlet marketplace for its merchandise is direct suppliers to the automotive {industry}, which signifies that its sale is conditioned by the situations of this market, and any disruption could also be transferred to the corporate’s exercise.

At this level, we should take into account that at the start of the last decade, there have been a lot of forecasts concerning the adoption of electrical autos globally within the quick time period. Though their use and demand has grown, the forecasts haven’t been met within the anticipated measure, which has delayed the expansion of the semiconductor sector for automotive manufacturing, which is of nice want in electrical and self-driving automobiles.

Reverse Recapitalization Dangers

The corporate executed a reverse recapitalization with a purpose to turn out to be public. Some buyers could not respect that Indie didn’t arrange an IPO, wherein extra due diligence is executed concerning the monetary accounts. In my opinion, Indie could obtain much less demand for the inventory due to this truth.

On June 10, 2021, we accomplished a sequence of transactions with Thunder Bridge Acquisition II, Ltd pursuant to the Grasp Transactions Settlement dated December 14, 2020, as amended on Could 3, 2021 The Transaction was accounted for as a reverse recapitalization in accordance with usually accepted accounting rules in the US of America. indie is deemed to be the accounting predecessor of the mixed enterprise and is the successor registrant for U.S. Securities and Alternate Fee functions, which means that our monetary statements for earlier intervals will likely be disclosed within the registrant’s future periodic studies filed with the SEC. Supply: 10-k

Takeaway

My funding thesis contains profitable collaboration with Expedera, effectivity enhancements, scalability development, and decrease energy consumption. Including additional collaboration with High Tier 1 automotive suppliers and the present backlog of $6.3 billion, I valued the corporate between $8, and $9 per share. I obtained these values by utilizing discounted money circulate evaluation, a comparability with earlier transactions, and acquisitions made by Indie. I don’t assume that the corporate may sell itself at a decrease stage than $8 per share. In any case, I believe that Indie is an effective firm to carry for an extended time frame. Indie seems like a winner within the {industry}.