indie Semiconductors Stock: Caught In EV And Self-Driving: (NASDAQ:INDI)

Folks interested in a pure play for automotive semiconductors may come across indie Semiconductors (NASDAQ:INDI). After a SPAC merger that took them public in 2021, the shares have fallen to what is near their all-time low.

This accounts for a 60% decline and brings it to a market cap of $770M. A small cap operating in a rising industry, some might wonder if there is big upside in the future. Having looked at indie’s current prospects, however, I think it’s too early, and some of its products may not fare well over time. The upside, while potentially large, seems too far on the horizon, and so I think INDI makes for a better Hold until its balance sheet improves.

Business Summary

indie is a fabless semiconductor manufacturer with a focus on the automotive industry. They cite three major trends that will drive automotive demand for semis in the long run:

1. Electric vehicles
2. Autonomous driving
3. In-cabin experience

With a portfolio of semiconductor products that cover a wide range of uses, indie hopes to profit from the evolution of the increasingly sophisticated automobile.

Financial Picture

In its life as a public company, indie has been unable to turn a profit.

While gross margins are typically around 40%, operating results have been negative, and the gap hasn’t shown many signs of closing with scale.

The cash flow statement shows that this isn’t just a bunch of depreciation. Operating cash flows are consistently negative. Intriguingly, this has not deterred indie from spending millions on M&A to expand its product offering.

While they did raise $377.7M in the SPAC merger, the M&A activity has made further equity raises and some debt necessary.

Year-to-date, those outflows have continued, but they have declined in their severity.

As of Q2 2024, indie sits on $112M in cash and $157M in long-term debt.

All of this debt is due in just a few years, and so it remains an open question for shareholders today.

Revenues enjoy geographical diversity, but the largest concentration is in Greater China at around 43%.

Most of its revenue comes from its semi product sales, but audited figures of category-specific sales (say, LiDAR products versus radar products) are not disclosed by the company.

Future Outlook

I see some potential benefits here, but I see a few more concerns as well. Overall, I think it’s a bit early to get into INDI, but let’s start with what’s good and why that’s not quite enough.

Product Diversification

While they are focused on the automotive industry, I think that indie offers a good range of products for however that industry will evolve. CEO Don McClymont spoke to this during the Q2 earnings call:

Now, looking closely at our business progress in the second quarter, in the ADAS sector, I want to point out that indie is unique and differentiates itself from its competitors as being the only chip vendor offering all four of the key ADAS sensors; radar, vision, LiDAR, and ultrasound, which gives us the unique ability to offer any combination of these sensors. This will enable the scalable ADAS processing architectures that carmakers are demanding for deployment across their portfolio. This gives us the ability to fuse multiple modalities into a single chipset solution. We are now in discussions with key OEMs to define the specifications for our next generation of AI-centric sensor fusion products.

This is more in regards to products that will serve autonomous driving, but it does speak to the breadth of their offerings and the deals they can make with customers. While the pace and progress of self-driving and EVs are not perfectly clear and may not correlate much at all, indie is positioned to benefit from both as they improve, and it can give them some flexibility going forward.

Secular Tailwinds

On that note, I think they are about to get wind from the natural evolution in the industry and doesn’t require them to do much besides be present.

According to the International Energy Agency, annual EV sales continue to grow globally. The most significant growth has been in China (red), and so it’s not surprising that so much of indie’s revenue comes from there. They also project that half of global car sales are set to be EVs by 2035.

Arguably more potential exists with autonomous driving, as McKinsey & Company projects AD generating $300B to $400B per year, based on the way it can transform driving, noting that passengers would be able to spend trips actually doing things instead of sitting. To this end, I expect indie’s AD products and in-cabin products to be more closely correlated to each other than to EV, as autonomous vehicles would also need features inside for the passengers to use, such as getting work done.

The Tesla Factor

Tesla (TSLA) is where the picture gets less optimistic. Yes, Tesla’s success doesn’t necessarily equal indie’s failure. They aren’t even competitors, but crucially, Tesla isn’t one of their customers either. Elon Musk has historically spoken out against LiDAR and non-visual tech as the primary tool for AD. His argument is that only vision is capable of full autonomy, while LiDAR is much more limited, even when perfected. Radar, he believes, at least has some secondary functions when visual light is obstructed.

Out of all the car manufacturers out there, it seems to me that Tesla is the only one that had designs its vehicles with all three of the big trends (EV, AD, and in-cabin) in mind and with better quality than most. I suspect this will not only lead them to dominate the US auto market, but to define the trends.

Yes, indie has products for visual AD and radar, but Tesla has long declared that their vehicles already have all the hardware they will need. For example, they have the cameras and radars. Tesla just needs to develop the software and AI models to make it happen. This is why Tesla isn’t a customer for indie and isn’t about to be: the hardware is already there.

Tesla is also unique in that its electric vehicles are profitable. Both Ford (F) and General Motors (GM) report unprofitable EV lines. While they might use indie’s products, part of the problem here is that the margins just aren’t good enough. They would need to be able to set higher prices, but obviously Ford and GM want to keep their cost of goods lower. They aren’t going to accept price hikes on their chips blindly.

Other automakers like Ford and GM have been more willing to develop LiDAR as their main tool for AD. If Elon’s claims prove correct, and Tesla comes out with a huge advantage with full autonomy, Ford and GM may also struggle to sell these vehicles. Where does that leave indie other semi manufacturers with much of their portfolio, potentially useless?

China Market

In the long run, it seems more likely that indie will struggle with US sales and adjacent markets for this reason. The IEA also had this to say about EVs between China and the US:

In China, we estimate that more than 60% of electric cars sold in 2023 were already cheaper than their average combustion engine equivalent. However, electric cars remain 10% to 50% more expensive than combustion engine equivalents in Europe and the United States, depending on the country and car segment. In 2023, two-thirds of available electric models globally were large cars, pick-up trucks or sports utility vehicles, pushing up average prices. When exactly price parity is reached is subject to a range of market variables, but current trends suggest that it could be reached by 2030 in major EV markets outside China for most models.

Cost is going to matter here, and the time at which it does is important. For indie to see revenues scale favorably, they would need to see US markets develop more. Otherwise, I suspect they may find their revenues less diversified (as Tesla potentially takes market share) and more concentrated on China, and in my opinion that just isn’t as desirable as doing most of one’s business in the US.

Yet, it is still possible that growth in China and other Asian markets could be sufficient to make them profitable.

Financing

That gets us to the question of the long-term debt, most of which is due in a few years. Revenues need to grow fast enough that cash flows turn positive, become high enough to support future capex and M&A, and make debt repayment possible. If we assume they can maintain a gross margin of about 40% and not experience rising operating expenses, then revenues would have to grow from 2023’s $223M to about $1B.

That’s a lot of growth, and right now, it’s not clear they would get that in time, so refinancing on potentially painful terms is possible, as is share dilution now that they are public (and this is probably a reason why they went public in the first place).

Valuation

Additionally, we have to consider that M&A cuts both ways. Through their M&A, indie has been accumulating patents under one ticker as their own market cap has declined.

I think it’s too early to say what kind of free cash flow they will produce, but if they can get to $1B revenues and improve costs even slightly, $77M in annual earnings is possible. A market cap of $770M is a multiple of 10 for that. Can I imagine an unsolicited offer at a multiple of 10, especially if they have trouble with the financing in a few years? Absolutely.

Conclusion

So far, indie seems to be in the right spot for secular trends in the automotive industry, as electric vehicles, self-driving, and better in-cabin experiences require more semiconductors. Yet, its exact role in it is unclear. Many American EVs are tragically not profitable and don’t seem like a great source of growth for indie. The one profitable EV maker, Tesla, also succeeds in the other aspects and doesn’t seem to need indie. Their best market is probably China.

The real question is if the financial tailwinds materialize soon enough for indie to be able to repay its debt and continue to fund its own operations. It seems unlikely, and the current market cap appears favorable to an acquirer. Since a takeover seems like the best exit plan until results improve, perhaps investors deserve a better entry price.

While there is upside as demand for automotive semis grows, it seems too distant to justify a Buy. A Hold rating makes more sense in the meantime. As we watch future quarters, we’ll want to see if they can shift to positive cash flows or refinance their debt well in advance of problems.