CEVA: Likely Heading Sideways In The Short Term (NASDAQ:CEVA)

CEVA, Inc. (NASDAQ:CEVA) initially sold off after the release of its Q3 report. Quarterly results show the lingering impact of a number of headwinds giving CEVA fits. However, the stock has rebounded thanks to several outside factors, including industry updates which suggest the situation in the semiconductor industry may not be as dire as it had come to be perceived in 2022. Still, not everyone is likely to agree the coast is clear for CEVA. Why will be covered next.

The Q3 report fell short

The Q3 report did not get off to a good start, with the current CEO announcing his intention to retire at the end of 2022. In addition, while revenue managed a slight increase of less than 3% YoY to $33.7M, it still fell short of expectations by about $2M. Royalties contributed $11.4M and licensing, NRE and related contributed the remaining $22.3M. Non-GAAP EPS of $0.20 was in line with expectations, but it was also flat YoY. CEVA also ended up with a GAAP loss of $22.3M or $0.96 per share, which was not expected.

Note that the outsized GAAP loss was mostly the result of a $15.7M write-off of deferred tax assets and a $5M impairment charge related to assets from Immervision. GAAP earnings also account for $3.7M of equity-based compensation expense, but the non-GAAP numbers do not. These and a couple of smaller charges are the main reason why the GAAP numbers are so much worse off than the non-GAAP numbers. The table below shows the numbers for Q3 FY2022.

(GAAP)	Q3 FY2022	Q2 FY2022	Q3 FY2021	QoQ	YoY
Revenue	$33.660M	$33.195M	$32.790M	1.40%	2.65%
Gross margin	76%	79%	85%	(300bps)	(900bps)
Operating income (loss)	($4.031M)	($0.276M)	$1.694M	–	–
Net income (loss)	($22.304M)	($1.123M)	($0.167M)	–	–
EPS	($0.96)	($0.05)	($0.01)	–	–
(Non-GAAP)
Operating income	$6.782M	$4.634M	$6.514M	46.35%	4.11%
Net income	$4.705M	$4.314M	$4.653M	9.06%	1.11%
EPS	$0.20	$0.18	$0.20	11.11%	–

Click to enlarge

Source: CEVA

It’s also worth mentioning that CEVA spent $2.3M on stock buybacks, which gave EPS a lift in Q3. Nonetheless, the weighted-average number of shares outstanding rose from 22.9M to 23.2M in terms of GAAP and from 23.7M to 24.1M in terms of non-GAAP. Cash, cash equivalents, marketable securities and bank deposits totaled $144M. CEVA signed 18 new license agreements in Q3, which is 4 less than the 22 in Q2, including five with first-time customers.

Shipments declined in Q3 after doing the same in Q2. Licensees shipped 357M units, a decline of 23% YoY. Base station and IoT product shipments totaled 279M, down 31% YoY. Handset baseband chips accounted for the remaining 78M, continuing their recent decline with the market for mobile phones continuing to struggle. Soft demand in combination with elevated inventories contributed to the decline in shipments. COVID-19 lockdowns in China didn’t help either.

Guidance calls for FY2022 revenue of $132.5-135M, an increase of 8-10% YoY. Revenue in the first three quarters was $101.2M, which suggests Q4 revenue of $31.3-33.8M, a decline of 3.3% QoQ and 4.3% YoY at the midpoint. The forecast sees non-GAAP EPS increasing by 12% YoY, which suggests EPS of about $0.73 in FY2022. CEVA posted non-GAAP EPS of $0.55 in Q1-Q3, which implies EPS of $0.18 in Q4 or $0.04 less than a year ago. From the Q3 earnings call:

“Now for the guidance. As Gideon elaborated earlier, the smartphone and consumer electronics markets are suffering from softer demand, extended COVID-19 measures in China and elevated inventories. We expect this to prolong into the fourth quarter and anticipate our royalty revenue to be lower by about 10% sequentially. Our licensing business is showing good resilience, despite the uncertainty and expected to be at similar elevated levels of the $22 million.

On an annual basis, our revenue is expected to be in the range of $132.5 million to $135 million, which will represent 8% to 10% annual growth over 2021. Our non-GAAP net income and diluted EPS are also forecasted to show growth of approximately 14% and 12% over 2021, respectively, despite the issues faced this year.”

A transcript of the Q3 FY2022 earnings call can be found here.

CEVA looks pricey

CEVA may end FY2022 with double-digit growth in the top and the bottom line, but it’s worth noting that the numbers lost momentum as the year went by and are projected to end the year on a weak note. Both revenue and non-GAAP EPS are projected to shrink in Q4, unlike in Q1 when they grew. In addition, growth is faltering at a time when valuations are high by most metrics. The table below shows some of the multiples CEVA trades at.

	CEVA
Market cap	$605.18M
Enterprise value	$475.44M
Revenue (“ttm”)	$135.3M
EBITDA	$10.5M
Trailing GAAP P/E	N/A
Forward GAAP P/E	N/A
PEG ratio	N/A
P/S	4.82
P/B	2.59
EV/sales	3.51
Trailing EV/EBITDA	45.47
Forward EV/EBITDA	67.92

Click to enlarge

Source: SeekingAlpha

For instance, CEVA has an enterprise value of $475M, which is equal to 68 times EBITDA on a forward basis and 45 times EBITDA on a trailing basis. In comparison, the median for the sector is 12x and 13x respectively. Note that the forward multiple is higher than the trailing one due to declining earnings. CEVA is also in the red in terms of GAAP, which is why CEVA has no P/E multiples.

The stock has bounced

Earnings are under pressure and multiples are high, but the stock has bounced back after an 11% post-earnings drop on November 9. Keep in mind that the stock market surged higher on November 10 thanks to a better-than-expected CPI report and CEVA benefited accordingly. Still, the rally got another assist from a number of updates from industry-heavyweights, which suggest the semiconductor industry is not as bad off as some perceive it to be.

For instance, Taiwan Semiconductor Manufacturing Company Limited (TSM), which is seen by many as a bellwether for the semiconductor industry, reported on November 10 that its sales grew 56% YoY in October. On that same day, ASML Holding, Inc. (ASML) upgraded its outlook, with the company expecting annual revenue of 30-40 billion euros by 2025, up from the previous 24-30 billion euros.

These upbeat updates come against a backdrop of increased concerns as to the state of the semiconductor industry. Semis are facing a number of headwinds in 2022. For instance, monetary tightening with higher interest rates, forced higher by rising inflation, have made tech stocks less attractive, semis included. In addition, a growing number of semiconductor companies are reporting disappointing earnings due to weak consumer demand.

All these headwinds have weighed on semis. However, the prospect of lower interest rates with less inflation has raised hopes of an easing in headwinds. For instance, the Fed may not raise interest rates as much with lower inflation. Reports from industry heavyweights that chip demand may not be as bad off have helped. Semis seem to be back in favor, a least temporarily, and CEVA has been able to hitch along for the ride. The chart below shows how CEVA has bounced back in recent days. Nevertheless, the stock has lost 35% YTD.

It’s worth mentioning that the stock appears to be in a holding pattern. Note how the stock has bounced between the upper trendline, which can be seen as resistance, and the lower trendline, which can be seen as support. The stock has not been able to breach through either support or resistance despite several attempts to do so. The two trendlines are yet to converge, which suggests the stock is likely to continue to go sideways in the short term.

Investor takeaways

CEVA had some good news to share in its latest report. CEVA continues to sign up new licensees for its IP covering a range of applications, including advanced driver assistance system or ADAS, WiFi, wireless audio and satellite communications. Royalties from, for instance, 5G RAN were a bright spot after growing by 16% QoQ to $8.2M. More growth is expected next year with a continued rollout of 5G cellular networks.

However, whatever strength was offset by weakness elsewhere. Unit shipments declined due to weak demand. A number of factors contributed to this weakness, including weak consumer spending and COVID-19 lockdowns in China. If one were to exclude non-recurring write-offs and other one-time charges, the top and the bottom line were essentially flat in Q3.

Q4 guidance sees revenue and earnings shrinking with the slump in demand set to continue. The numbers for the whole of FY2022 are expected to show double-digits gains, but the trend suggests earnings are set to decline in the coming quarters. This would have been less of a problem if CEVA was trading at bargain-basement levels, but multiples for CEVA are very much on the high side, especially in comparison to where growth is.

Stocks can compensate for high valuations with fast growth, but in CEVA’s case, there is not much growth to go along with multiples that are far higher than other semis for the most part. While CEVA is profitable on a non-GAAP basis, not everyone is likely to assign much weight to it since most of the profits can be attributed to the exclusion of stock-compensation expense. CEVA is in the red in terms of GAAP.

I am neutral on CEVA. Sentiment towards semiconductor stocks like CEVA has improved recently due to the recent decline in inflation, which raises expectations of less monetary tightening that has weighed on tech stocks all year. Sentiment has also benefited from reports by industry heavyweights like TSM and ASML suggesting the semiconductor market is in better condition than some may have thought it to be. All of this has eased some of the concerns towards the semiconductor sector.

Still, it would not be prudent to ignore opposing views. Companies like TSM and ASML may be more positive in terms of their outlook, but there are other companies who are more negative on the industry outlook. CEVA’s own quarterly numbers do not give much to cheer about. The stock is also not exactly a bargain at current prices.

Bottom line, CEVA is currently caught between opposing forces that are pushing the stock in opposite directions. On the one hand, lack of growth in combination with high multiples is weighing on the stock. On the other hand, expectations of a Fed pivot have encouraged buyers to bid up prices for semiconductor stocks.

The charts suggest the stock is likely to go sideways in the short term, stuck between support and resistance that are keeping it contained. The stock has gotten a lift from positive news in recent days, but if the stock is to truly recover from the losses it has sustained this year, CEVA will need to show that its quarterly numbers are getting better and not worse and that CEVA is truly worth betting on. There is no evidence that is happening or about to. As long as that is the case, CEVA is not worth going long.