Indie Semiconductor: Synthetic Intelligence Processing Is A Recreation 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 progress from collaborations with Prime Tier 1 automotive suppliers, additional enchancment of the backlog of $6.3 billion, and inorganic progress. 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 affords automotive semiconductors and software program options centered on purposes like ADAS, in-vehicle leisure, parking help, cameras for automobile detection, and different progressive instruments.

Indie started as a venture between engineers with a protracted profession within the {industry} in 2007, turning into the primary producers of CMOS sign amplification methods for cellular units, inserting 250 million of their merchandise into the market, previous to getting into the record of public corporations in 2015. Most traders on the market might know the corporate for its expertise for in-cabin expertise and electrification efforts.

Indie is just not solely interesting as a result of it operates in a rising market, inorganic progress 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 progress technique by way 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 your complete enterprise, together with the personnel and mental property of the corporate.

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

Ms. Parekh has greater than 25 years of worldwide capital markets and operational expertise within the excessive progress Expertise, Media, Telecommunications and Shopper Web industries, each as an advisor and senior government. Previous to working at HPE, Ms. Parekh held a number of senior management roles at world funding banks, together with Barclays Capital, Goldman Sachs and Jefferies. There she suggested non-public and public corporations on quite a lot of transactions together with M&A, capital structuring, joint ventures, non-public placement, in addition to on enterprise growth and strategic progress initiatives on the board degree. Supply: Board Of Administrators

With income progress, administration just lately introduced {that a} richer product combine and new product pipeline may develop the gross margin and slender 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 Launch

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

R&D Bills Might Lead To Constructive 2025 Web Revenue

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 progress reported within the final quarter. In my expertise, corporations investing in R&D often report headcount progress and web gross sales progress. I see these efforts paying off for the corporate in 2025. In my DCF mannequin, I assumed that 2025 unlevered FCF may very well be optimistic. Q1 2025 EPS estimates from Searching for Alpha are additionally optimistic.

Within the final report, Indie Semiconductor famous that it’s making an attempt to develop its product growth actions, which is like music for my ears.

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

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

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

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

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

The brand new investments in R&D may convey new providers like picture sign processing, and digital sign processing. With these new instruments, for my part, the corporate might enhance the value of their methods, or provide non-obligatory improvements. Moreover, new instruments might convey new product demand from extra purchasers.

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

Analysis depth, measured by firm R&D spending, relates considerably to progress charges of gross sales, property, web earnings, 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 embrace federal R&D funds, correlations with progress charges fall, often under significance. Supply: Analysis and Growth in Industrial Development

It is usually value noting that ADAS purposes supplied may change into extra scalable, in order that the NPU processes and reacts to a number of data together with site visitors lights, signal recognition, or the actions of pedestrians.

Moreover, I feel that enhancing energy consumption is also fairly helpful for the corporate’s high line of the earnings assertion. Basically, something that contributes to increasing the EV’s battery life will probably 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 growth. I additionally assumed that enhancements in energy consumption and scalability will probably be a number of the income progress and Adjusted EBITDA progress catalysts.

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

The corporate is predicted to profit from the expansion within the automotive semiconductor market, which is rising at near 11%. Allied Market Analysis, for example, experiences 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 feel that Indie’s web gross sales progress might not be removed from the expansion in these goal markets.

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

I might additionally count on vital web gross sales progress due to the corporate’s relationships with Prime Tier 1 automotive suppliers. For my part, 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, provides worthwhile perception about future web gross sales progress.

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

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

In accordance with the software supplied by Searching for Alpha, income progress YoY is 81%, and ahead income progress is 54%. Income progress is considerably increased than that reported by different corporations in the identical sector. I studied these monetary figures to design my discounted money circulate evaluation.

The steadiness sheet reveals a big enhance within the complete amount of money, from $7 million in 2019, to $138 million within the final report. Whole present property additionally elevated from $16 million in 2019 to $263 million in 2024. For my part, traders are giving money to INDI, which explains the current enhance in liquidity. For my part, traders pump in more money as a result of they count on that INDI’s web earnings may change into optimistic from 2025. As quickly as market members see the primary optimistic EPS, I feel that the demand for the inventory may enhance. 2025 EPS estimate is the same as $0.12.

The overall quantity of property elevated from $21 million in 2019 to greater than $803 million in 2024. Goodwill additionally elevated considerably because of current acquisitions. Within the final report, goodwill was near $290 million. It’s value noting the current acquisition of Kinetic Applied sciences, LLC, which may enhance motor management electrical effectivity within the coming years. Given earlier acquisitions, and profitable integration I might count on extra inorganic progress sooner or later. I feel that INDI is aware of methods to purchase different rivals.

Within the final report, complete present liabilities is the same as $151 million, and complete liabilities is $342 million. The ratio asset/legal responsibility is 2.3x, so I feel that that firm’s monetary state of affairs is secure. Lengthy-term debt is the same as $157 million. For my part, administration may obtain extra debt financing sooner or later. If 2025 web earnings turns into optimistic bankers might provide higher financing circumstances to INDI.

Valuation Utilizing Earlier Acquisitions Made By Indie Semiconductor

I reviewed the acquisitions made by Indie Semiconductor. I studied the variety of workers that these corporations had and the fee made. The record of targets consists of Kinetic, GEO, Silicon Radar, and Exalos. The knowledge 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/workers ratio is $1.5 million per worker. In accordance with Zoominfo, Indie Semiconductor experiences round 900 workers. Therefore, the implied valuation can 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 Might 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 various 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 primarily based on expectations supplied by Indie and my very own judgment. SA’s estimates are near 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 value 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 progress charges of 4%. My numbers are primarily based on my skilled judgment and expertise.

My assumptions about Adjusted EBITDA progress, 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 convey enterprise progress.

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

I feel that income progress will probably be decrease than 101% YoY from 2025 to 2033. In accordance with specialists, the worldwide automotive semiconductor market measurement may develop at a CAGR of 10.1% from 2023 to 2032. Moreover, Indie famous in a current presentation that its served addressable market may develop at near 13% from 2022 to 2027. So, I assumed 13% gross sales progress from 2026 to 2031, and 9% gross sales progress in 2032, and 2033.

Below these circumstances, I foresee web gross sales progress from 2025 to 2033 in addition to D&A progress, and capex enhance. Median Adjusted EBITDA progress from 2027 to 2033 can be near 7%. As well as, the median unlevered FCF progress from 2026 to 2033 can be 11%, and the median Adjusted EBITDA progress can be 11%. The Adjusted EBITDA Margin and the unlevered FCF margin are additionally according to that of rivals.

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 International Market Intelligence, a complete of 8 analysts delivered expectations that embrace optimistic EBITDA in 2025 near $62 million, and 2026 EBITDA of $97 million. They’re anticipating optimistic EBITDA in 2025, and 2026. I don’t assume that they may revise the newest reported EBITDA for the final quarter, which was the bottom 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%, primarily based on an estimate of Indie Semiconductor’s weighted common value of capital. I calculated the implied fairness of Indie Semiconductor by subtracting the web 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 Business Consolidates

The semiconductor {industry} is characterised by excessive technological innovation and fast transformations in relation to the usefulness of merchandise and costs available in the market. Actually, costs for the principle merchandise have decreased lately as a basic development. This characteristic and the declines in demand are elements that straight have an effect on the event of the enterprise.

The aggressive capability inside the market is conditioned on the one hand by the supply of sources for the event and analysis, and then again by adaptation to buyer calls for.

Moreover, at current, the market development is shifting in direction of the consolidation of the principle members, which might translate into decrease acquisition and declining circulation of the merchandise of small corporations.

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

Having a look on the markets typically, we should additionally add Mobileye, LeddarTech, Helm, Uhnder, Phantom, RealTime Robotics, Silicon Mobility, and AutoBrains inside the record of rivals for Indie, considering all product strains and never solely the specialised line of the historic core of the corporate.

Dangers From Third-Get together Producers

Indie relies on outsourced producers to finish its manufacturing phases, and the manufacturing processes on this sense are extremely delicate, during which any impurity within the process can result in the obsolescence of the product, with the addition that they’re troublesome to establish of their early phases. The corporate has already suffered delays and adverse circumstances 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 circumstances to the readjustment of producing circumstances, and in these adjustments, there’s a danger that the efficiency margins lower considerably. On this section, we should additionally contemplate the supply of uncooked supplies and the lack to switch one of many important ones as a result of low provide available in the market, which, though it’s not a direct danger arising from its producers, is among the elements which may complicate this course of when it comes to assembly deadlines and efficiency margins.

Dangers From Consumer Focus

Though the focus of gross sales in Aptiv, its principal 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 complete web gross sales will fall sharply.

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

At this level, we should contemplate that originally of the last decade, there have been numerous 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 vehicles.

Reverse Recapitalization Dangers

The corporate executed a reverse recapitalization with a purpose to change into public. Some traders might not recognize that Indie didn’t arrange an IPO, during which extra due diligence is executed concerning the monetary accounts. For my part, Indie might 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 Might 3, 2021 The Transaction was accounted for as a reverse recapitalization in accordance with typically 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 Trade Fee functions, that means that our monetary statements for earlier intervals will probably be disclosed within the registrant’s future periodic experiences filed with the SEC. Supply: 10-k

Takeaway

My funding thesis consists of profitable collaboration with Expedera, effectivity enhancements, scalability progress, and decrease energy consumption. Including additional collaboration with Prime 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 promote itself at a decrease degree than $8 per share. In any case, I feel that Indie is an effective firm to carry for a protracted time period. Indie appears to be like like a winner within the {industry}.