Xperi Stock: Attractive Upside If Guidance Holds (NYSE:XPER)

Man watching TV, remote control in hand

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On October 1st of this year, an interesting corporate breakup took place, separating one company into what are now called Xperi (NYSE:XPER) and Adeia (ADEA). While the latter of these is interesting in and of itself, our attention today is on the former known as Xperi. Over the past three years, the financial growth the company has achieved has been impressive. Having said that, profitability has been an issue. Normally, I would stay away from these kinds of prospects because I don’t like buying into enterprises that generate significant losses and cash outflows. But given how fast the company is expanding and management’s own near-term guidance, I do think that it might make for an interesting opportunity for growth investors who don’t mind accepting an elevated degree of risk.

Xperi – Making the ordinary extraordinary

Prior to October of this year, both Xperi and Adeia were one joined company. But today, they are separate. On the one hand, you have Adeia, which now operates as a pure-play IP business that owns a significant portfolio of patents, plus that engages in semiconductor IP licensing. On the other side of the equation, we have Xperi, which operates in four key markets. The first of these is the Pay-TV market, where the company utilizes its cloud-based digital video recording to create a more intimate and immersive personalized user experience. Through its platform, the company delivers key brands like TiVo, IMAX Enhanced, HD Radio, DTS, and more. this has been the key driver behind the company’s revenue growth, with sales climbing from nothing in 2019 to $262.7 million in 2021.

Next in line, we have the Consumer Electronics portion of the enterprise. Through this, the company powers billions of smart TVs, sound bars, AVRs, and other devices across the globe. this includes over 275 million gaming consoles that utilize its services and 550 million DTS decoders. In all, these offerings are made available in more than 400 leading brand devices across the planet. Although an integral part of modern entertainment technologies, this particular portion of the firm has actually declined in recent years, with revenue falling from $116.9 million in 2019 to $102.2 million last year.

Next, we have the Connected Car portion of the business. Using its AI-powered in-cabin Samsung solutions, the company hopes to improve the safety, comfort, and security of everyone within the vehicles its products are included in. At the same time, its solutions also immerse drivers in more of their favorite entertainment, including subscription-free digital radio. From 2019 through 2021, sales of this unit grew modestly, increasing from $81.2 million to $87.6 million. And finally, we have the Media Platform portion of the firm. By combining the favorite entertainment of its users from live TV, on-demand, streaming services, and even through its free ad-supported video network, all into a simple and personalized experience, the company seeks to increase customer satisfaction while also creating additional revenue streams for entertainment technologies. At the end of the day, this unit’s goal is to create and enrich an end to end, omniscreen advertising environment that keeps customers happy and that facilitates additional revenue generation for media businesses. This is also a rapidly growing part of the company, with sales climbing from nothing in 2019 to $34.1 million last year.

Xperi Historical Financials

Author – SEC EDGAR Data

The markets that Xperi operates in seem to be rather large and growing. For instance, the global market for IPTV was estimated to be worth $51 billion in 2021, with a 17.8% annualized growth taking it to $115 billion by 2026. The infotainment market, which includes radio, was estimated to be worth $20 billion in 2021, with a forecast of growing to $38 billion by 2027. There are other verticals the company touches on as well. But you get the point. With revenue of $486.5 million in 2021, up from $198.1 million in 2019, it’s clear that upside potential is significant from here. This is not to say that everything has been great. From 2019 through 2021, the company’s net loss has worsened, going from $80.9 million to $175.6 million. Operating cash flow went from a positive $24.7 million to a negative $23.5 million. And EBITDA went from a positive $4.3 million to a negative $33.9 million.

XPER Q2 Financials

Author – SEC EDGAR Data

When it comes to the 2022 fiscal year, we have seen much of the same. Revenue of $245.1 million narrowly beat out the $244 million reported the same time only one year earlier. The company’s profitability did improve, with its net loss declining from $77.5 million to $59.7 million. But if we look at other profitability metrics, the picture is still worsening. Operating cash flow went from negative $20.8 million to negative $22.3 million. Meanwhile, EBITDA turned from negative $8 million to negative $11 million over that same window of time.

Significant mix shift toward growth areas

Xperi

In most cases, I would stay clear of a company like this. However, management seems to have a good head on its shoulders. Management understands, as the image above illustrates, what its current core operations are and what its growth opportunities are. They also plan to invest significantly in areas that are growth-oriented. This all makes a great deal of sense. On the whole, the company expects for its revenue to grow at a rate of between 12% and 15% per year for the next three to five years. This should take sales up from around $500 million this year to at least $702.5 million three years from now. That assumes an annualized growth rate of only 12% per year moving forward.

Presentation

Xperi

Growth isn’t everything though. The company also expects profitability to improve significantly. This year, the EBITDA margin of the company should be roughly break even. The expectation is for this to grow to about 10% next year. And three to five years out, that margin should be between 25% and 30%. If this comes to fruition, then the firm is trading, using estimates for 2023, at a forward EV to EBITDA multiple of 7.9. Stripping out interest expense from this at 6% per annum and with only $50 million in debt on its books compared to the $175 million in cash on hand, we end up with a forward price to operating cash flow multiple of 10.9. Taking annualized growth out two years and using the lower end of margin guidance, we would end up with multiples of 2.5 and 3.3, respectively, at that time given current pricing today.

Historical Financials

Author – SEC EDGAR Data

Takeaway

Based on the data provided, I will say that I find myself impressed by what I see when looking at Xperi. I generally don’t like these types of opportunities because of the tremendous bottom line uncertainty. But the company has a surplus of cash and a clear growth strategy set before it. Growth already in recent years has been impressive and the markets in which the firm operates are significant in size. Add on top of this how cheap shares are even if management nails the lower end of guidance, and I cannot help but to rate this a ‘buy’, even if it is on the riskier side of things due to its reliance on a projection of the future.

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