There's no shortage of excitement for automotive technologist Indie Semiconductor (INDI 2.38%). As the digitalization of cars rapidly increases -- thanks to the continual rise of electric vehicles (EVs), in-cabin infotainment, and work surrounding self-driving cars and advanced driver assist systems (ADAS) -- Indie's revenue growth has been soaring. Revenue more than doubled from the year prior in the third quarter of 2023, up 101% to $60.5 million.
Nevertheless, the stock price remains down nearly 30% from Indie's 2021 IPO. There's more going on under the hood that has the market questioning Indie's all-out expansion. But if Indie can solve some issues with its business model, perhaps shares can rally higher.
Is this a millionaire-making investment worth betting on right now?
Big bets on the future of vehicle safety
Indie management doesn't specifically break down where its sales come from, but it's becoming clear that most of its chips are being used in EVs and charging infrastructure, as well as in-cabin experiences -- including wireless charging (smartphone charging inside a car) and in-cabin car LED lighting.
The small start-up has made big bets on ADAS, including purchasing radar, LiDAR, and camera "sensor fusion" chip designs from peers like Analog Devices and ON Semiconductor, in the last couple of years. Management likes to compare its acquisitive strategy to Broadcom's in the early 2000s.
But much of that ADAS and self-driving tech sales potential lies in the future. Management says of its $6.3 billion backlog with current and prospective customers, $4.6 billion of it is for ADAS-related chips in radar, LiDAR, and camera vision (including $2 billion in new backlog from its recent purchase of GEO Semiconductor earlier in 2023). Additionally, it was admitted on the Q3 earnings call that the LiDAR backlog, in particular, has not yet materialized into actual revenue.
Image source: Indie Semiconductor.
Still, despite ample competition from the likes of Analog Devices, NXP Semiconductors, Infineon, Monolithic Power Systems, STMicroelectronics, and other smaller auto tech upstarts like Ambarella, Indie has been able to keep the pedal to the metal.
I wrote earlier this year that Indie's growth needs an asterisk. Because of numerous acquisitions paid for by the issuance of new stock, Indie's revenue expansion isn't as good as it appears on the surface. Over the last reported trailing-12-month period, total revenue is up 92%. But on a per-share basis (which accounts for dilution from new stock issuance), Indie's revenue growth is up "only" 72%. Not bad, Indie.
Data by YCharts.
A growth story complicated by shareholder and capital structure
This company's upside from the future of automotive is clear, but I have other concerns that hold me back from taking a long-term position in the stock. That's partly because it went public in 2021 via a SPAC and partly due to how it's funded those numerous acquisitions -- Indie has a complicated shareholder structure.
There was just over $52 million in outstanding warrant obligations (the right held by some investors, especially institutional investors, to purchase more newly issued stock) listed under liabilities as of the end of September 2023. Management simplified this issue by issuing 7 million new shares and exchanging all remaining warrants for stock in late October and early November.
However, the total share count is going to increase to 181 million in the fourth quarter of 2023, up from just shy of 147 million in Q3 (basically, a 23% quarter-over-quarter increase in the total number of shares outstanding). The upshot to this, for the time being, is that expected operating losses will get diluted. No problem with that, but dilution cuts both ways. When the company (eventually) starts turning a profit, that net income will also be spread across all those new shares.
Another item: Indie reported that 46% of its Q3 revenue came from China. That's far above the average among its semiconductor company peers. Further complicating this is that Indie operates through a majority-controlled (but only partially-owned) subsidiary in China called Wuxi Indie Microelectronics. Several Chinese investors, including a couple of automotive equipment manufacturers, retain equity investments in Wuxi. Wuxi is pursuing an IPO in China by 2027, but if it isn't successful, these Chinese investors will be payable in more Indie stock (listed in the U.S.).
This also obscures Indie's shareholder structure and adds to potential dilutive events in the future.
One more important note: Indie's balance sheet now features $161 million in cash and short-term investments, but its total debt is also $161 million. Interest expense is also going to be a headwind to future profitability. This is no longer a lean start-up semiconductor company.
I believe that few investors are aware of Indie's complicated shareholder and capital structure to fund its expansion. The business is still unproven as of yet, as it still doesn't turn a profit (both quarterly generally accepted accounting principles (GAAP) operating income and free cash flow remain in the red). Thus, any bet on this stock should be speculative. The inclusion of Indie Semiconductor in an investment portfolio, if at all, should reflect that.
If Indie can solve some of these complexities in its business, perhaps the stock price can start to better reflect the company's meteoric growth. But in the meantime, I believe there are better long-term semiconductor stocks to invest in that can help investors make some serious dough.
