Day: March 21, 2023

It has been some time since I final posted on Searching for Alpha, little question, I missed it. What pushed me to take action as we speak is the intent to share my evaluation on the enticing threat/reward ratio of certainly one of our largest investments, Valens Semiconductor (NYSE:VLN).

VLN is an Israel-based Audio/Video fabless chip marker, which derived 70% of its 2022 revenues from the Audio/Video market (medical gear, training, client and so on…) with the remainder coming from the automotive market (Mercedes Benz the one buyer at this level). The Audio/Video (AV) market isn’t horny by itself and will spook buyers who’re fearful a few “reversion to the imply” of COVID-beneficiaries. That stated, the VA6000 developed for the Audio Video market is retrofitted for use in Mercedes infotainment system (integrating USB, Ethernet, Audio, and Serial Management), which speaks to the R&D synergies throughout each segments and the working leverage story of VLN (most vital metric in semis). Valens technique is obvious, leverage the worthwhile audio video market to faucet into the excessive progress side of automotive.

To that time, we observe that AV gross margins are 70-80% (a lot larger than the common semiconductor firm) and has been constantly so even pre-COVID with 2019 GMs for AV at 80% (2023 steering implies steering of $70M income and 75% GM). This gross margin profile is well-above semiconductor friends of ~60%.

Abstract of firm’s portfolio:

• VA6000: Utilized in Audio Video and Mercedes (all fashions in 2023). The VA6000 transfers AV over lengthy attain cables (as much as 100m). The chip makes use of HDBaseT customary, which has similarities to the HDMI customary, however works on longer distances. Sony, Samsung, Panasonic, Siemens, and Logitech are clients of Valens. Revenues are secure from this enterprise with enticing gross margins (high-end of the semis business). The VA6000 utilized in Mercedes transfers audio/video and ethernet connection between ECUs. Content material is $25 per L2 car.
• VA7000: In contrast to the VA6000, which leverages the HDBaseT customary, the VA7000 leverages the MIPI A-PHY customary. The usual has been adopted by the IEEE and Valens is the first contributed to this open sourced platform. The MIPI A-PHY customary apply the identical know-how utilized in smartphones that connects digital camera modules to the show, however as a substitute does that over longer distances, which was solely carried out earlier than via using “bridging chips”. The VA7000 is being sampled to OEMs and would be the main progress driver for Valens beginning 2025.

Abstract of what we like within the enterprise:

1) Robust company governance with automotive specialists on board of administrators. Peter Mertens, BOD Chairman, was CTO at Volvo for six years, an government at GM for eight years, and member of BOD at Audi. He joined Valens board in 2020. Moreover, Yahal Zalka was on boards of Waze, Onavo, DesignArt Networks, all three have been acquired by Google, Fb, and Qualcomm respectively.

2) A number of added advantages to automotive OEMs:

• VA7000 is the one prepared resolution out there as we speak that helps as much as 8Gbps obtain hyperlink (from video to ECU) in automotive with Texas Devices and Maxim Built-in (a part of ADI) solely supporting 4Gbps. We observe that L3+ autonomous automobiles would require 8-16 Gbps in networking bandwidth relying on the variety of sensors and show high quality (4K show requires 16Gbps).
• Future A-PHY merchandise will enable direct integration between digital camera (CSI-2) and ECU eradicating the necessity for “bridge” connections (see diagram under). Toshiba is a supplier of bridging options, which carry a $2 ASP. Eradicating bridging options cut back price and complexity.
• Administration has proved OpEx self-discipline and concentrate on profitability. Except for hitting/exceeding all monetary targets set for 2022, VLN Adj. EBITDA is anticipated to be (-$14M) for 2023 versus ($-24M) estimate given again in Might 2021. This comes regardless of softer income expectations of $22M ($120M outlook for 2023 offered at de-SPAC date in This fall of 2021 versus $98M outlook offered in March 2023) given the difficult macro surroundings.
  • That stated, we predict administration (like many different de-SPACs) have been over-promising on the income and design wins entrance. As an example, StoneRidge partnership (the place VLN offers VA6000 to rear digital camera inside vans within the after-market) was presupposed to ramp in 2023, and Valens steering of ~$30M implies that there is not a lot coming from the partnership. Second, administration’s change of tone concerning design wins from “first half of 2023” to “someday in 2023” is price clarification. We’re prepared to show a blind eye on this given the macro surroundings, however we might be sellers of the inventory in case these targets preserve getting pushed.

MIPI Alliance

3) Engaging acquisition goal: We consider Marvell (MRVL), Broadcom (AVGO), Qualcomm (QCOM), and Nvidia (NVDA) can be curious about including Valens to their portfolio. We observe that Mellanox founder, Eyal Waldman, is an investor in Valens and made the next testimonial in 2021:

Because the founder and former CEO of Mellanox Applied sciences, I do know the significance of using information. Knowledge is the premise of our future life. As a way to make the most of information, it’s essential to retailer, retrieve, compute and manipulate information. Connectivity is the premise know-how for doing all of that, for making information be just right for you. As an entrepreneur, I’ve invested in Valens, a semiconductor firm based mostly in Israel, as a result of I consider within the workforce, and I consider that their know-how options will drive the ADAS and the autonomous market.

4) Partnerships that present portfolio high quality:

• Valens has not too long ago introduced partnership with Intel to fabricate A-PHY options to clients.
• Income stream from Mercedes (VA6000 can be in all Mercedes fashions in 2023)
• Samsung, LG and Valens have an HDBase-T IP firm, which its know-how is the spine of the VA6000
• Partnership with Mobileye, extra particulars under in catalyst part.

Catalysts:

1. Design win announcement with auto OEMs. Valens already acquired RFIs from a number of OEMs, and have sampled its VA7000 to eight OEMs. Valens expects two design wins this yr. Given its relationship with Mercedes, we predict it is very doubtless that Mercedes is certainly one of these two. We additionally observe that the Valens workforce was at Toyota per the corporate’s Twitter account (right here). Content material per car for the VA7000 is estimated at +$45, per administration (versus $25 for VA6000).
2. Ramp of Mobileye’s EyeQ 5. Mobileye famous that its EyeQ 5 can be first to incorporate A-PHY in its SoCs when the VA7000 is certified at OEMs. Mobileye shipped 21 million EyeQ SoCs in 2021 with 27% CAGR in 2019-2021.
3. Valens expects to be FCF constructive in 2024. Frankly talking, we predict this can be a excessive bar to achieve and requires almost $130M in revenues (up 30% from what administration guided for 2023), which we’re not positive about.

Draw back Dangers:

1. Whereas administration has executed properly thus far, we predict there may be room to enhance communications with the Avenue concerning; CFO promoting greater than 500Okay of his shares (greater than 50% of his holdings) earlier this yr, and the rationale for change of commentary concerning design wins (from “by mid-2023” to “in 2023”) are price additional clarification.
2. The Audio Video market is a COVID-beneficiary, and it is but to be seen how resilient this section may be in 2023. Administration 2023 steering was much-better than feared, however execution stays key.

Worth Goal: We worth VLN at $11 per share based mostly on sum of the components ($1.50 internet money, $2.00 for Audio Video or 9x 2023 EPS for the section, $7 for auto based mostly on 5x our $280M 2030 income estimate discounted at 10% WACC with Three OEM design wins).