It's another quarter and another acquisition for hot start-up Indie Semiconductor (INDI 2.38%). The chip and specialty parts designer specializing in the automotive sector has been a highflier at times in the last 12 months, but as of this writing, the market's enthusiasm for the highly acquisitive business is waning. As of this writing, share prices are down nearly 20% from this time in 2022.
Indie's prospects are promising, and the company has the sales-growth rates to back it up. But purchases of peers aren't considered a free lunch by shareholders. And it's this dynamic, I believe, that the market is finally starting to question. This stock might be a great long-term value right now, but be aware of the risks before making up your mind.
Is Indie's focus like a laser or a flashlight?
Up to this point, Indie's expansion got a big boost from the purchase of smaller peers or chip design intellectual property (IP) from larger businesses in the semiconductor world. Acquisitions have included IP from companies like Analog Devices and ONsemi (radar IP), GEO Semiconductor (computer vision chips), and TeraXion (LiDAR, or laser-based detection chips).
Indie's latest purchase is a tiny Swiss business called Exalos. It's a very small design team with a small patent portfolio that complements Indie's own capabilities in lasers and photonics, both used in advanced driver assist systems (ADAS), as well as healthcare devices, industrial equipment, and navigation systems. Indie paid $45 million worth of its own stock and will pay up to an additional $20 million in its own stock if certain revenue targets from the inclusion of Exalos are met.
Indie is hyper-focused on the automotive industry, with recent acquisitions particularly aimed at the ADAS part of the auto space. The small business is working on "sensor fusion," blending a portfolio of different sensors together to help make the road toward self-driving cars a reality. But in actuality, Indie has a lot of other stuff going on, too, including chips for in-cabin infotainment and vehicle electrification.
At any rate, with exposure to the rapidly changing automotive industry, Indie has been able to generate plenty of revenue growth -- up 102% year over year to $52 million, to be specific.
The real risk for Indie shareholders
Growth is obviously not the problem for Indie right now. Yet another bolt-on purchase is likely to keep sales headed high and to the right.
But Indie's strategy continues to dilute shareholders, which makes that sales growth just a bit less impressive than the headline print. As I wrote in early August after the last quarterly update, Indie's per-share sales growth was 76%, not the 100% sales growth when excluding all those new shares the company has issued to make acquisitions and reward employees.
Data by YCharts.
The Exalos purchase of $45 million in freshly printed Indie stock, worth about 3.3% of the current Indie market cap, will continue the trend. Additionally, Indie thereafter announced it's offering up to 7.8 million shares (about 5% of the last count of total shares outstanding) to close out some stock warrants -- the right for an investor to purchase shares at a certain price.
All of this is saying that Indie is still far from reaching GAAP profitability, as share-based expenses get subtracted to calculate net income or loss. On an adjusted basis (excluding stock-based expenses), Indie's progress toward breakeven has also stalled out. Adjusted operating loss was $33 million in the first half of 2023, about the same as it was during the first half of 2022.
In other words, Indie's hypergrowth isn't cheap. Growth by acquisition costs something -- in this case, equity dilution for shareholders and cash to integrate purchased businesses. As was demonstrated by the bear market in 2022 that hit high-growth software stocks particularly hard, throttling back stock-based expenses can be easier said than done.
I still believe this is the primary risk facing Indie Semiconductor, and it seems the market has started to catch on to this, as well, which is reflected in recent stock-price performance. After the Exalos purchase, Indie stock trades for about 6x expected full-year 2023 sales.
It might be a cheap long-term valuation, but only if Indie can keep growing at a rapid pace and make progress toward profitability. This is a high-risk (but only potentially high-reward) investment in the electric vehicle and self-driving car trend. Invest accordingly, if you decide to invest at all.
