Small automotive chip designer indie Semiconductor (INDI 2.38%) turned in another financial report card featuring fast growth. Second-quarter sales increased a whopping 102% year over year to $52.1 million, meeting its own guidance for a $205 million to $210 million annualized revenue run-rate.
The company has also been peeling back the veil on some of its specific chip designs to give investors a clearer view of exactly what it's working on these days.
A lot of investors are enthralled with indie's fast rise the last couple of years. I had a small position for a while. However, there are still risks to keep front-of-mind for this tiny fabless semiconductor company (meaning it engineers chips but doesn't manufacture them). Give these points a close look before deciding whether to buy.
Losses are steep, but for how long?
First, consider that despite all that revenue growth, indie still operates at a fairly steep loss. Losses under generally accepted accounting principles (GAAP) were $40.7 million (or a $16.3 million loss on an adjusted basis), compared to a GAAP operating loss of $30 million in second quarter 2022 (or $17 million).
Management slightly moved the ball on when it would achieve profitability. Three months ago, the company said it was on track to reach profitability in the second half of this year. In the second-quarter update, it now says it "remains on track to achieve non-GAAP [adjusted] operating income in the fourth quarter of this year."
Life is tough for a start-up chip designer, even if it relies on third-party partners to handle the capital-intensive work of manufacturing chips. Designing a single new semiconductor can take years, cost tens of millions of dollars, and require extensive testing (of the manufacturing process and the chip itself) before moving into volume production. And that's all before paying a sales and marketing team.
Put simply, indie says it's making progress on adjusted profitability, but it's still a long way off from being profitable by all metrics.
The good news, though, is that indie is still scaling rapidly, helped by a new secular growth trend aimed at electrifying and digitizing the modern vehicle. A product win was scored with auto parts manufacturer Bosch in support of a Toyota and Lexus occupant monitoring system. Other product launches in the quarter included wireless charging stations in vehicles for devices like cellphones and smartphone-based vehicle access chips.
Mind the diluted growth
As CEO Donald McClymont has been explaining, most of indie's engineering work now is going toward advancing the company's sensors for advanced driver-assist systems (ADAS).
It is working on what it calls "sensor fusion" (see image below). Automakers are making incremental improvements to driver safety features using a number of different signals. Indie is doing work on all of these sensor types, including radar; computer vision; laser imaging, detection and radar (lidar), and ultrasonic solutions.
Image source: indie Semiconductor.
Indie has gotten itself into position in this market via its own engineering as well as multiple acquisitions. As automakers smash the accelerator to the floor on vehicle digitization, it's a total land grab for semiconductor companies. What was once an opportunity adding up to a few hundred dollars per car is quickly turning into thousands of dollars per car for chip suppliers.
The only problem for indie's shareholders (at least for now) is that the company has largely expanded via issuing lots of new shares to pay for most of those acquisitions, as shown below.
Image source: indie Semiconductor.
The result is revenue growth that's not quite as good as it appears on a per-share basis because the company has had to dilute existing shareholders to continue growing the pie overall. This is a conundrum being faced by other fabless chip start-ups like Navitas Semiconductor (NASDAQ: NVTS) and Valens Semiconductor (NYSE: VLN).
Data by YCharts. TTM = trailing 12 months.
As long as indie can keep up this torrid growth, this problem will be glossed over. Management's forecast for the third quarter is for another year-over-year doubling in revenue to $60 million (a $240 million annualized run-rate).
But indie stock fell anyway, likely due to the slower pace on reaching profitability and the realization of the ballooning share count. The balance sheet isn't squeaky clean anymore, either, with cash and short-term investments of $181 million offset now by long-term debt of $156 million at the end of June.
A big rally for the stock earlier this year has now been mostly unwound. Investors might be tempted to buy the dip here, and I understand why: indie is making good progress picking up market share in the emerging automotive tech space. But mind the risks and keep any bet small at this point, as indie has yet to prove the long-term merits of its business model.
