Last month I wrote an article on auto-tech, featuring Nvidia (NVDA), Telsa (TSLA) and Qualcomm (QCOM), positing that autos would be one of the largest users of semiconductors in the future — for automakers to have any serious chances of succeeding in building an autonomous vehicle. Tesla alone is spending $4Bn in 2023 and 2024 on Artificial Intelligence, supercharging its efforts to challenge Nvidia head on. Nvidia, Qualcomm and Mobileye (MBLY) have sales pipelines over $60Bn in the next 5 years.
One of Seeking Alpha subscribers, SirLiberte suggested I look into indie Semiconductor (NASDAQ:INDI) as an excellent auto-tech play, and he is absolutely right; this is a company worth investing in. Thanks, SirLiberte for the recommendation.
indie is a preferred semiconductor partner for some of the world’s leading OEM’s and tier 1 suppliers. It is a tiny company, with just $251 Mn in estimated revenues for 2023, but more importantly small enough to grow aggressively for the next decade. Management cited $4.3Bn in strategic backlogs as of November 2022 below, which is 39x current revenue, so the runway is very, very long!
Here are the past few years of earnings since it went public and estimated revenues for 2023.
Revenue growth has been astounding in the last 3 years with a CAGR of 123%, with revenues growing from $23Mn in 2020 to an estimated $251Mn in 2023. Seeking Alpha consensus estimates call for continued revenue growth of 61% to $402Mn in 2024 and 41% to $565Mn in 2025, respectively. I believe these are reasonable and likely conservative, given the huge strategic backlog. Contract revenue is usually payment for design, prototypes, product development and project implementation along with the auto partner.
Technology and platform-agnostic: indie has always been product and supplier/OEM agnostic, and flexible to be a solid partner to some of the best logos in the business, such as Mercedes Benz, BMW, Stellantis, Ford and Hyundai, amongst more than 25 large global automotive manufacturers. It boasts of its products being found in 1 out of every 4 vehicles in the world.
Focused on fast-growing ADAS: As I mentioned in my article, Nvidia and Mobileye’s management believes a fully automatic car is at least a decade away, thus ADAS (Advanced Driver Assist Systems) is likely to be the fastest growing segment. One of its key strengths has been focusing on ADAS, especially vision, which allows it to partner with Lidar, cameras, radar, ultrasound, and any other vision OEM’s or Tier 1 suppliers. Their vision is unrestricted, and the adaptability to work and partner with several suppliers is one of their main strengths. indie’s software embedded solutions work across several platforms with different automakers.
Surmounted high barriers to entry: The auto tech supply business is a difficult and often torturous road; projects take years to implement, the testing process is extremely rigorous, and several iterations are completed before products hit the road. Sometimes the time to market is 5–7 years and rollouts are continuously pushed out. This product development and time to market life cycle is a huge barrier to entry, and meeting these high-quality standards is a strong testimonial to indie’s prowess and sustainability in this market. Product wins are sustainable recurring revenues with a SaaS like land and expand strategy, with customers buying more than one product.
Aptiv’s (APTV) Captive: indie gets about 37% of its revenues from the auto behemoth Aptiv, with $20Bn in sales and a $29Bn market cap. And while Aptiv does have a lot of tech strengths, it grew revenues at a terrible CAGR of only 2% from 2013 to 2022, with typical auto supplier like cyclicality, dropping revenues two years in a row in 2019 and 2020, besides incurring a massive 30% drop in revenue in 2015.
Dilution and cash burn: SBC (Share Based Compensation) and shares issued for mergers and acquisition are a drag, increasing share count from 108Mn shares to 145Mn in the last two years. Besides, the real dilutive possibility is the overhang of another 85Mn shares – largely because of the potential conversion of $160Mn of convertible notes. Secondly, the quest for vision ADAS ubiquity is expensive. indie has grown through M&A to meet product needs and increase market share, but burnt through $141Mn of cash in 1H-2023 alone, with $105Mn towards M&A. Besides cash, several earn-outs are also funded through additional SBC.
Unprofitable: With scale kicking in, gross profits did grow faster than revenues at 155% last year, but it still registered a gross margin of only 45%. At operating levels, indie lost a whopping 107% of revenues with R&D expenses of 109%!
indie’s TAM is large and growing and based on its 2022 10K, indie believes, that
According to IHS, the global automotive semiconductor market, which was valued at $54 billion in 2021, is projected to reach $130 billion by 2028, registering a compound annual growth rate (“CAGR”) over this period of 13%”.
This is in line with Semi-Conductor Association’s and Mckinsey’s study showing a similar growth rate of 14% from $58Bn in 2022, to $160Bn in 2030.
indie’s addressable market in its three segments, ADAS, User Experience and Electrification is also growing at a CAGR of 13% as we have seen below, with ADAS expected to double from $6Bn to $12Bn in 5 years.
According to indie’s 2022 10K, based on an S&P Mobility forecast, one of the key factors driving semiconductor growth is EV growth of 32% – from 5Mn vehicles in 2021 to 35Mn by 2028. Within that, indie also estimated that ADAS semiconductor content would grow at 21%.
With 37% of revenue from Aptiv, indie needs to make a serious effort to diversify its business beyond its largest customer, which is always subject to the cyclicality of the auto industry.
The second-largest threat is the 54% revenue exposure to Asia in 2022, with a large number of Chinese buyers. While a fragmented industry in China offers great diversity and opportunity, it is a threat with the current trade war between the US and China, with the latest missive being fired against Apple’s (AAPL) iPhone. Add to that a weakening Chinese economy, with GDP estimates trickling down, which could reduce demand in the future.
Quarter 2 financials – Key takeaways
indie repeated and reinforced its quest for ubiquity via holistic solutions within the vision/ADAS space one of its Q2 earnings call. This is the backbone of indie’s growth strategy, their distinctive competency and competitive advantage.
From the Co-Founder and CEO, Donald McClymont, emphasis mine.
Specifically, we are following a highly differentiated sensor fusion strategy versus a discrete approach enabling either the integration or flexible partitioning of multiple modalities including radar, computer vision, LIDAR, and ultrasonic solutions. We apply these modalities to capture data in different environments and ranges and to enable a comprehensive and accurate perception of the vehicle’s surroundings. The potential for a sensor fusion product roadmap amplified and expedited by our targeted acquisitions has set indie distinctly apart from our competition, many of whom are just trying to develop a single modality often in the hopes of landing an exclusive customer.
Contrast this with indie, we believe that no single technology will monopolize the playing field due to the complexity and diversity of the driving environment. The combination of sensor technologies in a harmonious fusion forms the cornerstone over a robust and efficient solution for advanced safety applications. We believe this holistic sensor strategy at scale ensures the highest levels of safety and effectively meets the diverse and immediate needs of ADAS implementations and one day, further out, the autonomous vehicle market.
Investors have been clamoring for better margins and indie obliged with adjusted gross margins of 52% in Q2, with guidance towards 53% for Q3 and expectations of adjusted operating profits in Q4. They also have a longer-term goal of 60% adjusted gross margins and 30% operating margins.
indie has the highest 3-year growth rate of 72%, by a mile. The smallest competitor, Monolithic (MPWR) at $940Mn in sales is expected to grow only 13%; the two largest, NXP Semiconductor (NXPI)and STMicrolectronics (STM) are growing in single digits. Interestingly, all four competitors are GAAP profitable, and it is heartening to realize that with scale, gross margins go up to the mid-fifties and EBITDA margins are also solid in the mid-twenties, indicating that indie too can reach decent profitability in 3–5 years.
Valuation and Investment Case
I think indie is absolutely on target in providing a holistic and agnostic solution; the industry is far too fragmented and complex to have one solution or supplier gaining significant market share — there will be different solutions preferred by different automakers and suppliers. Besides, OEM’s and Tier 1 Suppliers are coming from two different industries – tech and autos, and they themselves are struggling to find the right solutions – we see that from the long lead times from design to production.
The other important factor is indie’s decades of experience of taking technology to production, it is a team of seasoned veterans from both tech and auto – something newer LIDAR players such as Luminar Technologies, (LAZR) and Innoviz Technologies (INVZ) are just about to embark upon. Sure, they talk about large pipelines as well, but neither is close to production revenue. In my opinion, the decades of experience of the founders and indie’s team in rolling out solutions by working and partnering with OEMs from the blueprint stage is a huge competitive advantage. indie is a great combination of having the tech chops of over 400 patents and the decades of experience of (painful and arduous) auto production.
indie’s cofounder and CEO, Donald McClymont, stated in this interview, that as a small competitor (even with all the disadvantages), the combination of industry experience and agility as a small company favored them significantly. Rollouts require years of investment, and bigger companies with bean counters making decisions simply won’t commit the dollars without a sizable and identifiable ROI. This becomes another one of indie’s sweet spots.
I own indie and have been accumulating it in the $6.70-$6.80 range. Having a strong belief in auto tech, indie offers a compelling long term growth story with a long runway. Enough to tide over the major risks of dilution and losses. At 4.5x sales and a growth rate of 72%, this is a great bargain.