Nordic Semiconductor: Initiating Coverage With Narrow Moat Rating and NOK 165 Fair Value

We are initiating coverage of Nordic Semiconductor NOD with a narrow moat rating supported by intangible assets, a Standard Morningstar Capital Allocation Rating, and a 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.

Nordic designs Bluetooth Low Energy chips, used for battery-powered devices like fitness wearables, gaming controllers, smarthome devices, and industrial/healthcare applications, among others. BLE is the industry standard for short-range connectivity due to its high data throughput and easy installation, with Nordic having a 40% market share in a highly fragmented market.

There are some things we like about Nordic’s business. Although 60% of revenue is from consumer electronics with short product lifecycles (about three years), it doesn’t have direct exposure to the smartphone market, where original equipment manufacturers have high bargaining power and there’s more price competition. Nordic sells BLE chips for the peripherals that interact with smartphones, not for the actual smartphones. Second, it sells mostly through distributors, which normally connect chip firms with small and midsize customers. We believe larger firms like Qualcomm or Broadcom, which serve a handful of large clients, are less interested in the distribution channel as it only accounts for 25% of global chip sales. Last, 40% of Nordic’s revenue comes from the industrial/healthcare market with longer product lifecycles (five to 10 years).

Nordic’s thesis is not free of risks, though, which explains our High Morningstar Uncertainty Rating. The main risks we see are its position in the supply chain, concentration of revenue (45% of revenue from the top 10 clients), and weak financial guidance.