Company Reports

Narrow-moat Nordic Semiconductor's recovery continues as the company is gradually exiting the cycle trough seen last quarter. For the second quarter, revenue reached $127.4 million, up 73% sequentially from the weak $73.6 million seen last quarter, and down 16% year over year. The recovery has been strong among all end markets as inventory levels at distributors decreased to normalized levels and orders started to return. Investors welcomed the healthy guidance for next quarter, with Nordic expecting revenue between $150 million and $170 million, an 11%-26% sequential improvement. Nordic’s performance can be lumpy among quarters due to its high exposure to consumer electronics and high revenue concentration, where the top-10 clients normally represent more than 50% of revenue. Sales in the second half of the year should remain stronger due to seasonal patterns, especially in the consumer segment with Black Friday and Christmas resulting in higher consumer sales. We are maintaining our fair value estimate of NOK 127.

Narrow-moat Nordic Semiconductor's shares jumped by a sharp 35% in trading on April 24, reaching NOK 120 per share and mostly converging with our NOK 127 fair value estimate, which we maintain. The surprise came from Nordic’s second-quarter guidance, which implies an important acceleration to NOK 115 million- NOK 135 million in revenue compared with the weak NOK 74.5 million recorded this quarter. Nordic’s guidance is in line with our assumptions as we expect a sequential acceleration in revenue through the year from the very low base recorded in the first quarter. At this point, we recommend investors look for opportunities with a higher margin of safety, given the low visibility of Nordic’s financials as management does not provide yearly guidance and sales are normally lumpy given consumer exposure and high revenue concentration. We assume a high-single-digit revenue decline in 2024, followed by a strong 37% recovery in growth in 2025, reaching almost EUR 700 million in sales at a 9% operating margin.

Nordic Semiconductor reported poor fourth-quarter results, missing guidance for the second time this year. Sales were $108 million compared with guidance of $110 million to $130 million, with negative EBITDA of $6.9 million. It is the first time Nordic reported negative EBITDA since the first quarter of 2019. The outlook for the next quarter also looks bleak, with management estimating $70 million to $80 million in sales, a 30% sequential decline and a 50% year-on-year decline at the midpoint of $75 million. According to management, there is still too much inventory at its main distribution clients, so new orders for Nordic’s chips are getting delayed. Avnet, a U.S. electronics distributor and one of Nordic’s main clients, reported on Jan. 31 that it has high inventory levels that it expects will go down through the year. Although we expect Nordic’s situation will improve once inventories at electronics distributors go back to more normal levels, we are reducing our fair value estimate to NOK 127 as we adjust our medium-term forecasts. We now assume high-single-digit revenue declines in 2024 with breakeven profitability, followed by a strong recovery in 2025 that will result in margin expansion. We also assume Nordic won’t reach $1 billion in sales until 2028.

Nordic Semiconductor designs Bluetooth Low Energy chips, the main source of its narrow-moat and with 40% market share. During the past decade we believe Nordic Semiconductor has made a handful of good decisions. The first was to bet early in the BLE market around 2009, which is the standard for short-range communications in battery-powered devices thanks to good data throughput and easy installation. Second, Nordic switched from selling application-specific integrated circuit chips, or ASICs, where each chip is designed for a specific customer and application, to selling application-specific standard products, or ASSPs, which can be used by a wide range of customers and applications. These two decisions have caused Nordic’s revenue to multiply by 5 times since 2014. We also support Nordic’s decision to use distributors as its main sales channel, whereas larger competitors like Qualcomm or Broadcom are less interested given distributors only represent 25% of global chip sales and serve many small and midsize customers.

Narrow-moat Nordic Semiconductor reported a disappointing third quarter. Revenue was $135 million compared with expected guidance of $140 million to $160 million. The biggest hit, however, came from fourth-quarter guidance, with management guiding for a 30%-40% year-over-year decline when a few months ago it expected positive growth by the end of the year. We are reducing our medium-term revenue and margin forecasts and reducing our fair value estimate to NOK 145 from NOK 165. Shares are down 17% at the time of the writing to NOK 95, which we see as exaggerated despite the negative news.

Nordic Semiconductor designs Bluetooth Low Energy chips, the main source of its narrow-moat and with 40% market share. During the past decade we believe Nordic Semiconductor has made a handful of good decisions. The first was to bet early in the BLE market during 2009, which is the standard for short-range communications in battery-powered devices thanks to good data throughput and easy installation. Second, Nordic switched from selling application-specific integrated circuit chips, where each chip is designed for a specific customer and application, to selling application-specific standard products, which can be used by a wide range of customers and applications. These two decisions have caused Nordic’s revenue to multiply by 5 times since 2014. We also support Nordic’s decision to use distributors as its main sales channel, whereas larger competitors like Qualcomm or Broadcom are less interested given distributors only represent 25% of global chip sales and serve many small and midsize customers.

The market was very pleased with narrow-moat Nordic Semiconductor's second-quarter results, and shares are up by 14% at the time of the writing, trading in the NOK 135 range. Our NOK 165 fair value estimate remains unchanged.

Nordic Semiconductor designs Bluetooth Low Energy chips, the main source of its narrow-moat and with 40% market share. During the past decade we believe Nordic Semiconductor has made a handful of good decisions. The first was to bet early in the BLE market during 2009, which is the standard for short-range communications in battery-powered devices thanks to good data throughput and easy installation. Second, Nordic switched from selling application-specific integrated circuit chips, where each chip is designed for a specific customer and application, to selling application-specific standard products, which can be used by a wide range of customers and applications. These two decisions have caused Nordic’s revenue to multiply by 5 times since 2014. We also support Nordic’s decision to use distributors as its main sales channel, whereas larger competitors like Qualcomm or Broadcom are less interested given distributors only represent 25% of global chip sales and serve many small and midsize customers.

We are initiating on Nordic Semiconductors with a narrow moat, supported by intangible assets, a Standard Morningstar Capital Allocation Rating, and fair value estimate of NOK 165, 30% higher than the last closing share price. We expect a weak performance during 2023, in line with other semiconductor stocks, with midteen revenue declines as the electronics market absorbs excess inventories, followed by a recovery in 2024. Our fair value estimate represents a forward 2024 enterprise value/EBITDA multiple of 18 times.