indie Semiconductor (INDI -.96%) proceeds to impress. Although lots of businesses that went public by means of SPAC in 2021 are significantly underwater, this small chip designer continues to promptly scale its business on the back of connected car and electric powered auto technological innovation. As of this producing, the inventory has rallied about 73% so far in 2023, bringing it shut to exactly where it designed its debut in general public markets practically two yrs back.

Automotive know-how is going to be a major expense trend in the coming years, but the operate-up in indie Semi’s inventory has me a bit nervous. Is it much too late to obtain?

A large rally, but from exactly where?

Buyers cheered on indie’s Q4 2022 earnings update. Profits was $33 million (or $132 million on an annualized foundation), meeting management’s assistance supplied a number of months in the past. Much more importantly, although, the modified gross revenue margin on goods offered was 52.2%, exceeding the expectation for “the 51% variety.”

Management carries on to be expecting quick revenue progress, and even more profit margin growth to go along with it. The outlook for Q1 2023 is for “$160 million annualized revenue operate-rate” — or $40 million in revenue. Profits in Q1 2022 was just $22 million.

Part of the increase will occur from a partial quarter of revenue from the not too long ago introduced acquisition of GEO Semiconductor, an additional very small chip designer that provides personal computer vision digicam chips principally for car brands in Japan and South Korea (like Honda, Hyundai, and Nissan, to name a few).  

The expectation is for an additional quarter of altered gross margin in the 52% assortment at indie, up from 47.4% the calendar year prior. Bottom-line profitability (once again, on an altered non-GAAP foundation, or usually recognized accounting ideas), is envisioned in the second fifty percent of 2023.

If you happen to be keeping rating, indie reported adjusted internet losses of $63.2 million in full-yr 2022 and $42.4 million in 2021. In truth, indie is on a roll if it can deliver on the adjusted profitability entrance.

A caveat to all that advancement

Do bear in intellect, nevertheless, that indie’s advancement warrants a footnote. Some of its rapid enlargement in the final pair of yrs is thanks to a string of acquisitions, as it has sought to spherical out its portfolio of chips employed in sophisticated driver guide programs (ADAS) and other tech connected to EVs and electronic infotainment displays. Alongside the way, it produced liberal use of new stock issuance to do so.

So, on a for every-share basis, indie’s earnings development just isn’t rather as extraordinary as it seems at to start with glance. 

INDI Revenue (TTM) Chart

Knowledge by YCharts.

This effect could get started to average — a bit. indie started a $50 million inventory repurchase approach very last quarter. And for its newest GEO acquisition, it elevated debt somewhat than relying exclusively on stock to fund it.

GEO will be taken above for $180 million, 50 percent in income and 50 percent in new indie inventory. At the close of December 2022 (which won’t reflect the outflow of hard cash for GEO still), indie had $322 million in dollars and small-phrase investments and $160 million in debt.

Granted, incorporating GEO to the mix is anticipated to accelerate indie’s efforts to get by itself successful. The extensive-term outlook for its ADAS, electrical auto and charging, and in-cabin infotainment technology stays shiny. But the huge operate-up in inventory rate looks overdone to me.

indie currently trades for about 12 instances the expected annualized revenue operate level for Q1 2023, and additional than 24 times adjusted gross earnings (centered on the outlook for 52% adjusted gross margins in Q1). All of that growth is also staying diluted by a important amount of new shares getting issued to boot.  

indie Semiconductor has proven me sufficient that I continue being overall bullish on its prolonged-term prospective customers. But this is a little company functioning in a very huge, remarkably aggressive emerging market for car tech. The stock appears to be like overvalued correct now. I’ve taken a minimal earnings off the table and sold a handful of shares from my incredibly tiny situation in indie Semiconductor. 

I really don’t imagine it is really also late to have the enterprise, but I believe that patience will be rewarded right after a significant maximize in stock cost on very good, but not that great, financial news.

Nicholas Rossolillo has positions in Indie Semiconductor. His clientele could have positions in the stocks outlined. The Motley Fool has no posture in any of the shares mentioned. The Motley Idiot has a disclosure policy.

By Tara