Indie Semiconductor (INDI 1.52%) beat third-quarter 2022 expectations, helping send the stock over 20% higher in the last month alone. As good as results have been for the company, though, this is still a very high-risk, potentially high-reward stock.
New automotive design wins and higher electric vehicle adoption have expectations running high at Indie. Many investors are rightly excited about the proliferation of chips in the modern vehicle. But is this small auto tech supplier a buy right now?
How long will triple-digit percentage growth last?
Indie Semiconductor's revenue surged 147% higher in Q3 2022 to $30 million. Revenue through the first nine months of the year is up 164% to $77.8 million. Adjusted gross profit margins are also rising fast, up to 48.9% so far in 2022 compared to just 41.9% in 2021.
However, not surprisingly, the triple-digit percentage top-line expansion is beginning to slow. The outlook for the fourth quarter implies annualized revenue of $132 million (so about $33 million in actual revenue). That would be just a 10% quarter-over-quarter increase, or 40% growth on an annualized basis.
Let's not take too much away from this automotive chip designer, though. This is an emerging growth business that is expanding rapidly and is making progress toward its gross margin target of 60%. Its operating profit margin target of 30% is further off. Operating losses tallied up to $90.2 million in the first nine months of 2022, which includes $30.8 million in stock-based compensation and $10.1 million in acquisition-related expenses.
A small laser design company called TeraXion and ON Design Israel (formerly part of On Semiconductor) were acquired in October 2021, and radar company Symeo was acquired from Analog Devices in January 2022.
Early days for driver-assist and autonomous vehicle technology
Indie is starting to gain some traction in its various sensor designs (radar, LiDAR, computer vision, etc.). The same goes for its electric vehicle charging chips. In-cabin mobile connectivity and lighting have been advancing at a brisk pace in recent years. But overall there's a long runway of opportunity for this small research and design company, and it's making good progress so far. A healthy balance sheet with $150 million in cash and short-term investments, offset by debt of just $17 million, certainly helps.
But mind the risks here. Indie is still losing money, and has a stock sale program in place to help it manage its cash balance while it makes progress toward profitability. That, in conjunction with the employee stock-based compensation, will dilute ownership of the company for existing shareholders.
Additionally, there is customer concentration risk to be aware of here as well. Indie's second-largest customer in 2021, which at the time represented about 13% of revenue, is no longer a customer this year. And its largest customer in 2021 has grown, now representing nearly 37% of Indie's revenue so far in 2022. Additionally, a large multi-year but non-recurring engineering project has also ramped up this year and has caused "contract revenue" to increase from 7% of total sales in 2021 to 19% this year.
Nevertheless, outsized risk has to be accepted when investing in tiny emerging growth companies like this. The Q3 2022 update showed solid progress for Indie Semiconductor, so I remain invested -- although this is a very small position (less than 1% of my portfolio). Other well-established and growing chip stocks that play in the auto space deserve bigger chunks of my money. I will occasionally add a few shares of Indie from time to time if the growth story continues to play out as planned.