Melexis Earnings: Auto Chip Shortage Continues; Supply/Demand Could Balance by End-2023

Narrow-moat Melexis MELE met all of its guidance metrics in the first quarter of 2023, with sales up 22% organically to EUR 229 million (guidance EUR 225 million-EUR 230 million), gross margin at 45% (in line with guidance), and an operating margin of 26.7% (guidance of 26%). However, shares are down by almost 5% at the time of the writing; we believe this is explained by a major correction in the semiconductor sector. Dutch equipment-maker ASM International is down by 10% after booking weaker-than-expected new orders, while ASML is down by 2%. We have also seen how other U.S. stocks have corrected in the past three weeks as the industry continues to absorb higher inventories. However, automotive semiconductors are at a different stage in the cycle than smartphones and PCs, as there is still a shortage of automotive chips. The automotive chip shortage could start to ease in the late part of 2023 as supply continues to increase and demand normalizes, based on comments from Melexis’ management and also comments from C.C. Wei, CEO of Taiwan Semiconductor Manufacturing Company (the world’s largest foundry). We maintain our EUR 105 fair value estimate. Shares are currently trading in the EUR 90 range after a 15% correction since the highs in March and offer 17% upside.

Management said the backlog remains very strong, estimating demand is around 50% higher than what they can supply. The electric vehicle market is where supply constraints are more pronounced, while the imbalance is less for internal-combustion engine vehicles. Melexis foundry partner X-Fab is expanding capacity quarter on quarter, which has required Melexis to make EUR 190 million advanced payments to ensure supply capacity for its higher-end applications for the next three years. For the second quarter of the year, Melexis expects EUR 233 million-EUR 238 million sales, which would imply 11% to 12% growth year over year.