Valens Semiconductor: Executing Well In Difficult Environment With Catalyst In 2023 (VLN)

I think that the valuation for Valens Semiconductor (NYSE:VLN) is likely to have bottomed after its 1Q23 results.

However, I am of the view that the key for the investment case for Valens remains to be an automotive design win, which will bring in new interest for the stock as a player with ADAS exposure. On top of that, its continued execution towards adjusted EBITDA breakeven by the end of the year will also bring added catalyst to the stock as this means that Valens will be operating on positive cash flows while having the room to grow.

I have published an earlier deep dive into Valens which can be found here and my other articles on Valens can be found here.

Audio-video segment remains solid in a tough environment

One of the biggest news for the audio-video segment is the VS6320 chipset tape-out, which is a key milestone that Valens has reached for the market readiness of this new product. This also demonstrates how Valens continue to improve and expand its product offering within the audio-video segment and remains committed to invest in the segment.

The VS6320 chipset is meant for long-reach extension of the USB 3.2. As a note, as there is an increasing demand for higher bandwidth for USB peripherals, this is also increasingly driving the adoption of the USB 3.2 standard globally. As a result, the VS6320 chipset is the ideal chipset to connect all the remote USB 3.2 peripherals that are required in videoconferencing, industrial and medical applications.

Management highlighted how differentiated the VS6320 chipset is compared to what is available in the market.

The VS6320 chipset is a highly integrated single chip, hence dramatically smaller, less than half the power consumption, and yet still at a better cost.

During the 1Q23 quarter, management shared that Valens continue to be having solid conversations with potential customers for VS6320. They expect that these potential customers will adopt VS6320 relatively quickly.

As a result, management expects that the first engineering samples for VS6320 will be shipped by the last quarter of 2023 and that the chipset will be incorporated into customers’ products by the second half of next year.

In addition, the audio-video segment also saw traction in its VA7000 chipset, which was initially designed for automotive use cases, in the audio-video segment. As a result, both the new VS6320 chipset and its VA7000 chipset is likely to drive the growth in the audio-video market in the near term.

Automotive segment presents huge opportunities

In its automotive segment, Valens has two main chipsets: the VA6000 chipset and the VA7000 chipset.

Its VA6000 chipset is what the company has available today while the VA7000 chipset is the new chipset meant for ADAS applications.

Valens has its VA6000 chipsets in multiple models of Mercedes-Benz (OTCPK:MBGAF) that are currently being sold today. Based on the commentary from the earnings call, it does seem that Mercedes is also looking to include Valens VA6000 chipsets in their EV models as well as the company ramps up on its EV business.

The growth in the VA6000 chipset is largely expected to be driven by the growth rate of Mercedes-Benz cars, which will be largely predictable.

However, its VA7000 chipset is the one that I am more optimistic and excited about in terms of its prospects. It is the MIPI A-PHY non-symmetric automotive chipset family of Valens portfolio.

The VA7000 will enable the resilient and high-performance connectivity that is needed for future advanced driver assistance systems (“ADAS”).

The Valens team is current participating in several automotive OEM bids currently for the deployment of its VA7000 chipset. In addition, the team is also actively promoting its VA7000 offering for automotive, including in trade shows, to demonstrate the benefits of the VA7000 product suite.

In addition, the Valens team remains confident that they are on track to announcing their first design win in 2023. Management highlighted that these bids are progressing according to plan and are on track to announce their initial design wins this year.

While it is necessary to note that it will still take a few more years after the initial automotive design win for Valens to generate any revenue from the program, I think that any confirmed automotive design win would be a huge win for Valens and an affirmation for its VA7000 value proposition for ADAS applications.

1Q23 results

In the first quarter of 2023, Valens saw revenues increase 11% from the prior year, to $24 million. Although gross margins were 66% and down from 71% in the prior year, it still exceeded expectations, as a result of product mix change as Valens saw more revenue coming from the automotive business. The automotive business has a lower gross margin than its audio-video business.

In the first quarter of 2023, operating expenses was roughly flat compared to the prior year, coming in at $23 million. R&D expenses accounted for the majority of the operating expenses, taking up 61% of the first quarter 2023’s operating expenses. The R&D expenses for 1Q23 was largely flat at $14 million, compared to the prior year. These R&D expenses were incurred as a result of the tape-out of Valens VS3000 in the prior year and VS6320 in the current quarter.

GAAP net loss for 1Q23 was $5 million, roughly flat from the prior year and adjusted EBITDA for 1Q23 was a loss of $2.9 million, which is an improvement from the $4.1 million adjusted EBITDA loss for the prior year. This was a result of the better gross margins as highlighted earlier, strength from FX movements and some rescheduling of R&D expenses for new products that are expected to be incurred in 3Q23. Management highlighted that after the completion of this final development phase, Valens expects to be ready for mass production.

I would highlight that Valens balance sheet remains robust. In 1Q23, Valens had cash of $140 million in its deposit and the company has zero debt to date.

The company has net cash used in operational activities of around $9 million in the quarter, and I expect that with its focus on achieving adjusted EBITDA breakeven by end 2023, we will see this figure become positive by 2024. Thus, the cash on its balance sheet is more than sufficient for the company’s operations and growth.

With the company trading at $258 market capitalization, the cash on hand of $140 million also implies that net cash makes up 54% of the company’s market capitalization. With its focus on achieving breakeven in adjusted EBITDA and cash flow positive by end 2023, the net cash position should continue to grow at form a larger part of Valens’ market capitalization.

Outlook for Valens

In the near-term, there are macroeconomic headwinds affecting the semiconductor business, with some of the implications that include slower inventory digestion and slower purchases across the semiconductor value chain. However, I think that Valens has navigated this well and exceeded expectations, as evident from its 1Q23 results.

Despite this near-term uncertainty, the Valens management team remains focused on its execution of achieving adjusted EBITDA breakeven by end 2023, continuing to innovate on its technology and execute on its go-to-market strategy.

Valuation

I reiterate my earlier 1-year price target for Valens published in my deep dive.

With its focus on being adjusted EBITDA breakeven by the end of 2023, I am forecasting that Valens will reach profitability by late 2024 and see its first full profitable year in 2025 as the VA7000 ramp up progresses. As a result, Valens EPS will be growing at a rapid clip due to its low base.

My 1-year price target is derived using a 40x P/E multiple on my forecast of 2024F EPS.

As a result, I reiterate my 1-year price target of $4.10, implying 63% upside from current levels.

As a note, my 2024F EPS forecast depends heavily on the automotive design win that I expect Valens to achieve by 2023, which will unlock its EPS profitability by 2024.

As highlighted earlier, with $140 million cash on hand and the $258 market capitalization it is trading at, this implies the company’s net cash makes up 54% of its market capitalization. I expect that with the focus on achieving breakeven in adjusted EBITDA and cash flow positive by end 2023, the net cash position should continue to grow at form a larger part of Valens’ market capitalization.

Conclusion

In the current quarter, Valens exceeded expectations as revenue and loss per share performed better than expected.

The company continues to progress in innovating on its product portfolio for its audio-video segment, further cementing its technology leadership in the segment.

In addition, its VA7000 chipset is expected to have its first design win in the automotive segment in 2023 and management commented that this is going well and progressing according to plan.

All in all, I think that despite the difficult macro backdrop and uncertain environment, Valens has actually exceeded expectations and remains on track to be adjusted EBITDA positive by end 2023.

I think that this, along with its first design win in the automotive segment for VA7000 will be a key catalyst for the company in the near term. Valens looks attractive at current levels on a risk/reward perspective as I have created a buy trigger alert for the company earlier.

My 1-year price target for Valens is $4.10, implying 63% upside from current levels.

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