Indie Semiconductor, Inc. (NASDAQ:INDI) is a small-cap stock that provides automotive-based semiconductor and software solutions to tier-1 vendors, which are then implemented by some of the world’s largest automakers. To put it another way, INDI is a good proxy to play the growing auto tech revolution.

We are bullish on the INDI stock for three main reasons, which support our long thesis.

Forward Valuations Are Impacted by Strong Growth Potential

Unlike a decade or two ago, most car purchasers in the world’s major auto markets now choose amenities, safety, and onboard technologies over vehicle performance.

INDI appears well-positioned to profit from this trend, even as it focuses on developing solutions that might cater to three of the car industry’s fastest-growing applications: electrification, user experience, and safety systems (ADAS).

Already, INDI has demonstrated solid revenue growth numbers; over the last three years, revenue has grown at an impressive CAGR of 70%, and revenue has increased by 5x since its listing date nearly two years ago (also note that quarterly revenue has continued to make sequential progress for seven consecutive quarters).

Given the robust foundation, one would expect some slowing in growth potential, yet such is the scope of growth in this business. The backlog reached an astonishing $4.3 billion as of November 2022, more than double what was observed in FY20-$2 billion. Given this, INDI’s top-line growth is expected to be 125% in FY23 (estimated sales of $249 million), with sales poised to more than double to $560 million in two years.

Given the great visibility and these bullish top-line estimates for the near future, we believe INDI’s price-to-sales multiple is relatively low. Based on FY24 revenue, the company trades at a forward P/S of 2.9x, representing a 17% discount to the historical forward P/S average multiple.

The Acquisition of GEO Semiconductor Strengthens INDI’s Position in the Automotive Technology Sector

INDI aspires to play a critical part in enabling the uncrashable car, but in order to do so, a comprehensive solution that skillfully utilizes and combines the capabilities of multiple sensors, such as LiDAR (Light Detection and Ranging), RADAR, ultrasonic, and cameras is required. A more well-rounded and fluid sensor fusion service (combining all of these sensors) can be quite useful in assessing environmental conditions and making appropriate navigation decisions.

In March 2023, INDI completed the acquisition of Geo Semiconductor, an entity that specializes in video processing capabilities for automotive cameras and already has established commercial relationships with over 20 Tier 1 suppliers.

Given the role these cameras play in functions such as lane detection, night vision, occupant monitoring, surround view, blind spot detection, automated parking, and so on, it’s no surprise to find a growing proliferation of these cameras in a vehicle (the image below gives you a sense of their growing omnipresence). In fact, IHS predicts that the global vehicle market would require 430 million camera electronic controls by 2028, up from 265 million in 2023 (implying a 10% CAGR).

Aside from the appealing IP on offer (GEO has 100 global patents), the GEO acquisition will be critical in improving INDI’s financial profile. For starters, the potential for revenue synergies will be enormous, owing to increased cross-selling opportunities and better geographic reach (for example, GEO is already well placed with tier 1 OEMs in Japan, whereas INDI has found it difficult to make rapid progress in this market).

Then there’s GEO, which is a fast-growing firm; revenues have more than doubled in the last two years, and GEO is expected to contribute at least $40 million to INDI’s top line in FY23). Finally, this acquisition is expected to be earnings accretive to FY23 EPS, allowing INDI’s H2 EPS to turn positive (INDI’s FY EPS will only turn positive in FY24).

INDI Stock Has an Attractive Risk-Reward Profile

INDI could be a good contender for investors looking for ideal value possibilities in the semiconductor universe. It is worth noting that the stock’s relative strength ratio vs the SPDR S&P Semiconductor ETF is currently around 48% below the midpoint of its range and may experience some mean reversion towards those levels.

The fact that unfavorable sentiment regarding INDI’s stock appears to be fading is also encouraging. The percentage of float that was shot was in the double digits at the start of December last year, but it has slowly fallen in recent weeks and is now only in the 9% range. Despite lower short interest, there is still a good chance of a short squeeze, since the days-to-cover ratio is still well above seven days.

Finally, things appear to be looking up on INDI’s weekly chart. To begin, note that the price action flattened off during 2022, with the stock forming a foundation around the $5-$9.5 levels. Since then, the market movement has gradually solidified into a type of ascending channel, with a brief rally in progress. I believe the current price level provides an excellent entry point since the stock has lately fallen below the lower limit of the ascending channel, providing a nice solid runway to the higher boundary.

The stock could also benefit from INDI’s expanded share repurchase program. So far, the business has only used 15% of its $50 million repurchase war chest, and a big portion of that should be put to good use at these levels.

Featured Image: Freepik @ tiko33

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