indie Semiconductor (INDI 2.75%) continues to impress. While many companies that went public via SPAC in 2021 are far underwater, this tiny chip designer continues to rapidly scale its business on the back of connected auto and electric vehicle technology. As of this writing, the stock has rallied about 73% so far in 2023, bringing it close to where it made its debut in public markets nearly two years ago.
Automotive technology is going to be a top investment trend in the coming years, but the run-up in indie Semi's stock has me a bit nervous. Is it too late to buy?
A massive rally, but from where?
Investors cheered on indie's Q4 2022 earnings update. Revenue was $33 million (or $132 million on an annualized basis), meeting management's guidance provided a few months ago. More importantly, though, the adjusted gross profit margin on products sold was 52.2%, exceeding the expectation for "the 51% range."
Management continues to expect rapid sales growth, and further profit margin expansion to go along with it. The outlook for Q1 2023 is for "$160 million annualized revenue run-rate" -- or $40 million in revenue. Revenue in Q1 2022 was just $22 million.
Part of the increase will come from a partial quarter of sales from the recently announced acquisition of GEO Semiconductor, another tiny chip designer that provides computer vision camera chips primarily for auto manufacturers in Japan and South Korea (like Honda, Hyundai, and Nissan, to name a few).
The expectation is for another quarter of adjusted gross margin in the 52% range at indie, up from 47.4% the year prior. Bottom-line profitability (again, on an adjusted non-GAAP basis, or generally accepted accounting principles), is expected in the second half of 2023.
If you're keeping score, indie reported adjusted net losses of $63.2 million in full-year 2022 and $42.4 million in 2021. Indeed, indie is on a roll if it can deliver on the adjusted profitability front.
A caveat to all that growth
Do bear in mind, though, that indie's growth deserves a footnote. Some of its rapid expansion in the last couple of years is due to a string of acquisitions, as it has sought to round out its portfolio of chips used in advanced driver assist systems (ADAS) and other tech related to EVs and digital infotainment displays. Along the way, it made liberal use of new stock issuance to do so.
Thus, on a per-share basis, indie's revenue growth isn't quite as impressive as it appears at first glance.
Data by YCharts.
This effect could begin to moderate -- a bit. indie began a $50 million stock repurchase plan last quarter. And for its latest GEO acquisition, it raised debt rather than relying solely on stock to fund it.
GEO will be taken over for $180 million, half in cash and half in new indie stock. At the end of December 2022 (which doesn't reflect the outflow of cash for GEO yet), indie had $322 million in cash and short-term investments and $160 million in debt.
Granted, adding GEO to the mix is expected to accelerate indie's efforts to get itself profitable. The long-term outlook for its ADAS, electric vehicle and charging, and in-cabin infotainment technology remains bright. But the big run-up in stock price looks overdone to me.
indie currently trades for about 12 times the expected annualized revenue run rate for Q1 2023, and more than 24 times adjusted gross profit (based on the outlook for 52% adjusted gross margins in Q1). All of that growth is also being diluted by a significant amount of new shares being issued to boot.
indie Semiconductor has shown me enough that I remain overall bullish on its long-term prospects. But this is a tiny business operating in a very large, highly competitive emerging market for auto tech. The stock looks overvalued right now. I've taken a little profit off the table and sold a few shares from my very small position in indie Semiconductor.
I don't think it's too late to own the company, but I believe patience will be rewarded after a massive increase in stock price on good, but not that good, financial news.
