Company Reports

Although narrow-moat Melexis just met its sales guidance in the first quarter, shares have jumped by 17% compared with the prior closing. We believe the market gave low credit to management’s first-quarter guidance given broad concerns about an autos volume correction hitting Melexis’ chip sales. Management even increased its guidance sequentially, guiding for EUR 242 million-EUR 247 million in the second quarter, compared with EUR 241.7 million in the first quarter. We maintain our EUR 100 fair value estimate for Melexis, with the shares still offering 25% upside. As we reiterated in the past, we believe Melexis shares are a good buy during cyclical lows, given auto chip sales correct more during market downturns, but then come back strongly when there is a recovery. Melexis’ clean balance sheet makes it an ideal candidate to withstand cyclical downturns.

Narrow-moat Melexis’ fourth-quarter 2023 helped ease investors' concerns over a potential downturn in the automotive chip cycle. Revenue grew by 12% year over year and management guided for 3% to 4% growth in revenue during fiscal 2024. In line with other peers, Melexis expects a weaker first half of the year followed by a stronger second half, according to its conversations with customers. Inventory at distributors keeps decreasing, but at some point during the year they should start being replenished. Growth in 2024 should mainly come from volumes as management expects pricing to remain relatively constant. We maintain our EUR 100 fair value estimate with shares offering 20% upside.

Melexis is an asset-light, family-owned company focused on the sale of sensor integrated circuits, a type of analog/mixed-signal chip, to the automotive industry. In the past decade, Melexis has grown by almost 10 times organically, strengthening its competitive position by improving the versatility of its product portfolio. It now owns 75% of the intellectual property of its product sales, compared with 40% in 2006. We estimate Melexis has many years of growth ahead, given that the number of chips per car (combustion, hybrid, or electric) is expected to grow at high single digits annually as more chips are added to every car to improve user experience and safety.

We believe narrow-moat Melexis shares offer an attractive buying opportunity at this point. Although we are decreasing our fair value estimate to EUR 100 from EUR 105 after adjusting our medium-term forecasts, shares offer 40% upside for long-term investors who are willing to endure a few quarters of uncertainty. Melexis is trading at 13.0 times the 2022 EBIT and 11.3 times the last 12 months' EBIT.

Melexis is an asset-light, family-owned company focused on the sale of sensor integrated circuits, a type of analog/mixed-signal chip, to the automotive industry. In the past decade, Melexis has grown by almost 10 times organically, strengthening its competitive position by improving the versatility of its product portfolio. It now owns 75% of the intellectual property of its product sales, compared with 40% in 2006. We estimate Melexis has many years of growth ahead, given that the number of chips per car (combustion, hybrid, or electric) is expected to grow at high single digits annually as more chips are added to every car to improve user experience and safety.

Narrow-moat Melexis shares were up 6% on the morning of Oct. 25 after strong results for the third quarter. The share price reaction has now moderated and shares are flat at the time of the writing. Sales increased 16% organically to EUR 249 million with an operating margin of 28.6%, the highest quarterly margin in several years. However, we do not expect this record margin to be maintainable in the long term and we forecast a terminal midcycle operating margin of 24%. We expect revenue growth will moderate in 2024 and 2025 as the supply of automotive chips keeps growing and demand moderates after the shortage since the coronavirus pandemic. We maintain our EUR 105 fair value estimate, with shares trading at 13.3 times the 2022 EBIT and 11.7 times the last 12 months' EBIT.

Melexis' second-quarter results are not surprising given several auto chip companies have already reported healthy results. Demand for auto chips remains steady and the chip shortage is improving. Second-quarter sales were EUR 237 million, at the higher end of the guided range, up 14% year over year and 4% sequentially. For the third quarter management expects sales to grow more than 4% sequentially (at the midpoint of third-quarter guidance). Management also upgraded its full-year guidance targets given the strong performance in the first half and expects a good performance for the remainder of 2023; it now expects sales to be up between 14% and 16% (previously 11% to 16%) with a gross profit margin above 45% and an operating margin of 27% (26% previously). We maintain our EUR 105 fair value estimate and see the shares as fairly valued as of Aug. 2.

Narrow-moat Melexis met all of its guidance metrics in the first quarter of 2023, with sales up 22% organically to EUR 229 million (guidance EUR 225 million-EUR 230 million), gross margin at 45% (in line with guidance), and an operating margin of 26.7% (guidance of 26%). However, shares are down by almost 5% at the time of the writing; we believe this is explained by a major correction in the semiconductor sector. Dutch equipment-maker ASM International is down by 10% after booking weaker-than-expected new orders, while ASML is down by 2%. We have also seen how other U.S. stocks have corrected in the past three weeks as the industry continues to absorb higher inventories. However, automotive semiconductors are at a different stage in the cycle than smartphones and PCs, as there is still a shortage of automotive chips. The automotive chip shortage could start to ease in the late part of 2023 as supply continues to increase and demand normalizes, based on comments from Melexis’ management and also comments from C.C. Wei, CEO of Taiwan Semiconductor Manufacturing Company (the world’s largest foundry). We maintain our EUR 105 fair value estimate. Shares are currently trading in the EUR 90 range after a 15% correction since the highs in March and offer 17% upside.

We are initiating coverage of Melexis with a EUR 105 fair value estimate and narrow moat rating supported by switching costs and intangible assets. The shares appear fairly valued.

Melexis is an asset-light, family-owned company focused on the sale of sensor integrated circuits, a type of analog/mixed-signal chip, to the automotive industry. In the past decade, Melexis has grown by almost 10 times organically, strengthening its competitive position by improving the versatility of its product portfolio. It now owns 75% of the intellectual property of its product sales, compared with 40% in 2006. We estimate Melexis has many years of growth ahead, given that the number of chips per car (combustion, hybrid, or electric) is expected to grow at high single digits annually as more chips are added to every car to improve user experience and safety.