Valens Semiconductor: At Risk Of Rolling Over Again (NYSE:VLN)

Valens Semiconductor (NYSE:VLN), a supplier of high-speed video and data connectivity solutions to the audio-video and automotive markets, has essentially gone sideways in the last several months. Even a beat in earnings expectations and a raise in guidance could not do much to change the path the stock is currently on. Furthermore, the stock is exhibiting signs of weakness, which suggests it may be getting ready to resume the downtrend from earlier in the year. Why will be covered next.

VLN is making good progress

The stock shrugged it off, but is wasn’t because the Q3 report did not put in a good effort. VLN even managed to beat expectations for the top and the bottom line. Q3 guidance called for revenue of $22.5-22.8M and adjusted EBITDA of minus $5.6-6.2M, but Q3 revenue came in better with an increase of 21.3% YoY to $23.1M. Adjusted EBITDA was minus $1.7M, much less than expected.

VLN still finished with a GAAP loss of $5.3M or $0.05 per share and a non-GAAP loss of $1.5M or $0.02 per share, but losses were significantly smaller than before. Gross margins declined, mostly as a result of the automotive segment growing faster than the audio-video segment, especially with the former carrying lower margins than the latter.

Note that the EPS gains were affected by the numbers of shares. The weighted-average number of shares outstanding, GAAP or non-GAAP, increased to 98M in Q3, up from 13M a year ago when VLN was yet to become a publicly listed company. VLN had $152.9M in cash and cash equivalents on its balance sheet in Q3, down from $156.8M in Q2. The table below shows the numbers for Q3 FY2022.

(GAAP)	Q3 FY2022	Q2 FY2022	Q3 FY2021	QoQ	YoY
Revenue	$23.141M	$22.481M	$19.071M	2.94%	21.34%
Gross margin	69.7%	70.2%	72.4%	(50bps)	(270bps)
Operating income (loss)	($5.139M)	($7.933M)	($8.210M)	–	–
Net income (loss)	($5.305M)	($9.995M)	($8.487M)	–	–
EPS	($0.05)	($0.10)	($0.94)	–	–
Number of shares	98.06M	97.44M	13.16M	0.64%	645.14%
(Non-GAAP)
Gross margin	70.5%	71.0%	72.7%	(50bps)	(220bps)
Adjusted EBITDA	($1.738M)	($4.469M)	($2.728M)	–	–
Net income (loss)	($1.534M)	($8.069M)	($3.005M)	–	–
EPS	($0.02)	($0.08)	($0.23)	–	–
Number of shares	98.06M	97.44M	13.16M	0.64%	645.14%

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Source: VLN Form 6-K

Guidance calls for Q4 FY2022 revenue of $23.1-23.2M, flat QoQ and an increase of 11.8% YoY at the midpoint. The forecast sees a further decline in gross margin and a bigger adjusted EBITDA loss of $9.0-9.7M. Keep in mind that VLN is in the process of taping out the VA7000 automotive chipset, which increases R&D expenses and pushes down earnings.

	Q4 FY2022 (guidance)	Q4 FY2021	YoY (midpoint)
Revenue	$23.1-23.2M	$20.7M	11.84%
Gross margin	66.1-66.5%	71.2%	(490bps)
Adjusted EBITDA	($9.0-9.7M)	($6.9M)	–

Click to enlarge

In addition, VLN raised FY2022 guidance for revenue, gross margin and adjusted EBITDA. The Q3 earnings report included the following statement:

“For the full year 2022, the company now expects revenues to range between $90.3 million and $90.4 million, up from the prior range of between $89.1 million and $89.8 million. Gross margin for the full year 2022 is expected to range between 69.3% and 69.4%, up from the prior range of 68.0% to 68.5%, and adjusted EBITDA loss is expected to be in the range of $(20.0) million to $(19.3) million, substantially better than our previous guidance of $(25.7) million to $(24.2) million.”

VLN still expects to break even on an adjusted EBITDA basis by the end of FY2023.

Management also had some early insights into FY2023. The automotive segment is expected to double in size, offsetting some of the demand weakness in the audio-video segment with an ongoing inventory correction. From the Q3 earnings call:

“Obviously, at this point in time, we will not be providing our guidance for 2023. However, if we analyze our business, and let’s start with the automotive, I think that what we’re seeing today, we’re starting to see indications that our automotive business is expected to double its revenue in 2023 from 2022. So in that respect, we feel that the automotive business is quite resilient.

With respect to the [audio-video] business, so I would say that the audio-video business is probably more correlated to some of the global macro trends that we see today. So we assume that at least during the first part of ’23, customers will mainly consume inventories that they accrued in the challenging supply demand environment.”

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

The stock is looking for direction

VLN took a good swing at it with better-than-expected quarterly results and guidance, but the market shrugged off the latest updates. Note how the stock has slowly lost ground after the Q3 report was released on November 9 as shown in the chart below. Keep in mind that this happened even though the stock market, including semis, went on a huge rally during this period. For instance, the SPDR S&P 500 ETF (SPY) gained 5.5% on November 10 and the iShares Semiconductor ETF (SOXX) did even better with a 10.3% gain in just one day in response to the latest inflation numbers.

Note also how the stock has been looking for direction. The stock has essentially gone sideways for months. The stock has lost 50% YTD, but it has recovered some of the lost ground after hitting the low of the year in late June. In fact, the lows in the second half of the year can be connected to form a lower trendline, which happens to be ascending and can be seen as support.

On the other hand, there seems to be stiff resistance in the $4.40-4.60 region. Note how the stock has failed to breach this level despite repeated attempts. Furthermore, there is the upper trendline, which is descending. This seems to be forcing the stock lower, including in recent days.

This upper trendline is converging on the lower trendline, which means the stock will eventually have to break through either resistance imposed by the former or support provided by the latter. This is not likely to happen soon since they are ways away from converging, which suggests the stock is likely to keep going sideways in the meantime, hemmed in between resistance and support.

Valuations may not be enticing enough

The table below shows some of the multiples VLN trades at. VLN is in the red, even in terms of EBITDA, which is why it does not have multiples for several commonly used metrics, including P/E. However, with a market cap of $429.8M, VLN is, for instance, valued at 4.3 times annual sales. In comparison, the median for the sector is 2.5x.

Valuations for VLN are not excessive, but they are not enticing enough to convince all the buyers out there they need to step in while the price is good. The recent price action suggests this may be what is happening, which could explain why buyers have decided not to step in, even though the company had good things to say and despite a huge rally in stocks, semis included.

	VLN
Market cap	$429.80M
Enterprise value	$275.18M
Revenue (“ttm”)	$88.0M
EBITDA	($27.6M)
Trailing GAAP P/E	N/A
Forward GAAP P/E	N/A
PEG ratio	N/A
P/S	4.30
P/B	2.22
EV/sales	2.44
Trailing EV/EBITDA	N/A
Forward EV/EBITDA	N/A

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Source: Seeking Alpha

Investor takeaways

I am neutral on VLN as stated in a previous article. VLN does not have a long history since it has not been around that long, only becoming a publicly listed company last year. This can make it harder to evaluate it as a company, but it appears VLN is making good progress if the Q3 results are a guide, especially in terms of the automotive segment.

This is expected to continue with VLN believing it can double automotive revenue in FY2023 compared to FY2022. VLN is still in the red, whether in terms of GAAP, non-GAAP or EBITDA, but it seems to be on track to break even on an adjusted EBITDA basis by the end of FY2023. While the numbers are likely to keep fluctuating, the existing trend is for the numbers to get better over time. Both the Q3 quarterly results and Q4 guidance came in better than expected.

However, it is worth noting that despite a fair amount of good news, the market shrugged off what VLN had to say. It is also concerning that the stock did not follow along with the stock market rallying after inflation came in lower than expected. The stock is now lower than where it was before the Q3 earnings report and the recent rally in semiconductor stocks.

For instance, SOXX has gained 12% in value since November 9. In contrast, VLN is basically flat with the stock closing at $3.88 on November 18, which is two cents lower than before the release of the Q3 report on November 9. And that is with a $0.22 or 6% jump in value on Friday, November 18. VLN has underperformed.

The failure of the stock to follow through does not bode well. If the stock is not reacting to good news, then it’s worth asking what it will do with bad news. Keep in mind that VLN could be confronted with setbacks in the coming quarters. Already, the audio-video segment is dealing with excess inventories in the market. The semiconductor market is faced with declining demand, which could start to weigh on VLN more than it already has.

Bottom line, the future is not set in stone and the stock is still stuck between support and resistance, but the recent price action suggests that when the stock breaks through either support or resistance as it must eventually, it is more likely to be the former than the latter. If a major rally in semiconductor stocks and better-than-expected quarterly results and guidance could not get the stock going, then it is hard to see what will. The stock looks to be leaning to the downside. Odds are that is where it is heading.