Melexis Should Benefit From Growing Auto Chip Content for Years

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

Melexis designs automotive chips that measure variables like positioning, temperature, and electrical current and convert real-world signals into digital signals to control car functions in powertrain or safety systems. Melexis’ business is competitively advantaged: (1) Its chips are embedded in original equipment manufacturers’ production lines. Changing a chip provider would take months of retesting and reprogramming with no improvements. (2) Chips represent a negligible amount of a car’s cost, so OEMs choose them based on performance and not price. A Melexis chip costs less than EUR 0.50, compared with tens of thousands for even the most modest cars. (3) Chip providers like Melexis have years of engineering expertise and long-term relationships with OEMs.

Despite being smaller than one-stop-shops like NXP Semiconductors or STMicroelectronics, Melexis has carved out a solid position by focusing on smaller-volume niches that big players are less interested in. In 2021, each car manufactured in the world contained about 375 analog chips and Melexis supplied 18 of them, or about 5% market share. In the past decade, Melexis has grown by 10 times organically and now owns 75% of the intellectual property of its sales, compared with 40% in 2006.

On a midcycle basis, we think Melexis’ shareholders can expect annual sales growth of 8%-15%, mainly driven by increased chip content per car; EBIT margins of 24%-27% (Melexis’ cost structure has been stable for decades); and a good management team, which has delivered an 18% dividend CAGR since 2006 while properly reinvesting in the business (10%-15% of sales to research and development). Melexis is a family-owned firm, with the owners receiving modest remuneration historically and focusing on cost controls.