Valens Semiconductor Stock Has Run Into Opposition (NYSE:VLN)

Valens Semiconductor (NYSE:VLN) had several updates to share in the past few weeks, almost a year after it became a publicly listed company through a SPAC. This includes last week’s Investor Presentation and the latest earnings report a week earlier. The latter got a tepid response as it came in mixed, but the former helped send the stock higher on lots of volume. However, the stock may find it harder to continue higher. Why will be covered next.

The stock seems to have encountered resistance

The chart below shows how the stock has fared since it started trading on the NYSE in September 2021. It’s fair to say that the stock has not done all that well, having lost more than half its value in the last 12 months and that’s with the stock having gained roughly 50% since the lows in May of this year. Nevertheless, the stock is still down 43% YTD in spite of the rebound in the stock.

Note how the 2022 lows and highs in the chart can be connected to form trendlines. The upper trendline can be seen as resistance, which has kept the stock from moving higher on a number of occasions. The stock is now bumping up against the upper trendline, having spent the last few days trying to close above what looks like resistance. If the stock is to move higher, it will have to overcome opposition from resistance.

VLN has yet to succeed in breaking through and staying above resistance, but it was able to do so for a very short while when it temporarily moved above the trendline during intraday trading on the 18th, only to close below resistance by the end of the day. This coincided with the arrival of the latest Investor Presentation from VLN.

The market seems to be giving VLN the benefit of the doubt at this time

The stock is in a position to break through resistance that has kept the stock contained for the better part of a whole year. But VLN would likely not be here if not for the latest Investor Presentation. The presentation got a positive response as it seems to have encouraged buyers to step in, causing the stock to jump higher on elevated volume.

The presentation made it clear VLN has some ways to go as it is losing money, but it also showed how much potential there is for growth. It’s the latter and not the former that seems to have gotten the most attention. VLN was key to the development of standards like A-PHY and HDBaseT, which puts it in an excellent position to take advantage as the markets for these standards take off, even though VLN is still very much a money-losing start-up at the moment.

For instance, VLN expects the total addressable market for advanced driver-assistance systems or ADAS and autonomous driving or AD to grow to $8-10B in 2025-2026, assuming production of 100M cars, each requiring 20 chips at $4-$5 a piece. In theory, if all goes well, VLN could be in the early stages of a rapid expansion that will take place in the coming years.

However, while VLN may have lots of growth potential, the most recent earnings report showed that there is a lot of work to do. The Q2 report came in mixed, with some good and some not so good. Revenue went up at VLN, but so too did losses. Still, the Q2 numbers were better than expected. Guidance had called for revenue of $21.6-22.0M, gross margin of 66.3-67.3% and an adjusted EBITDA loss of $8.8-9.8M.

Q2 revenue actually increased by 28.4% YoY to a record $22M, mostly due to the audio-video segment. This segment carries higher margins than the automotive segment, resulting in a better-than-expected gross margin of 70.2%. On the other hand, margins declined QoQ and YoY. Losses were not as big as expected, but they still went up in Q2.

VLN ended with a GAAP loss of $10M or $0.10 per share in Q2, twice the amount in Q1. In terms of non-GAAP, VLN finished with a loss of $8M or $0.08 per share, four times the loss in Q1. Adjusted EBITDA was minus $4.5M in Q2 FY2022, which is more than the $2.1M loss in Q2 FY2021. It’s worth mentioning that the $10M GAAP loss includes a $3.6M expense due to foreign exchange rates. On the other hand, VLN postponed some spending, especially in R&D, lowering expenses and adding to the bottom line.

The loss helped lower cash and cash equivalents to $156.8M in Q2, down from $165.5M in Q1. The weighted-average number of shares, GAAP or non-GAAP, increased to 97.44M. There were just 11M shares in Q2 FY2021, but this was before VLN became a publicly listed company. The table below shows the numbers for Q2 FY2022.

(GAAP)	Q2 FY2022	Q1 FY2022	Q2 FY2021	QoQ	YoY
Revenue	$22.481M	$21.620M	$17.510M	3.98%	28.39%
Gross margin	70.2%	71.4%	71.2%	(120bps)	(100bps)
Operating income (loss)	($7.933M)	($7.197M)	($4.077M)	–	–
Net income (loss)	($9.995M)	($5.050M)	($3.698M)	–	–
EPS	($0.10)	($0.05)	($0.68)	–	–
Number of shares	97.44M	97.15M	11.02M	0.30%	784.21%
(Non-GAAP)
Gross margin	71.0%	72.1%	71.1%	(110bps)	(10bps)
Adjusted EBITDA	($4.469M)	($4.086M)	($2.116M)	–	–
Net income (loss)	($8.069M)	($1.939M)	($1.737M)	–	–
EPS	($0.08)	($0.02)	($0.16)	–	–
Number of shares	97.44M	97.15M	11.02M	0.30%	784.21%

Click to enlarge

Source: VLN Form 6-K

Guidance calls for Q3 FY2022 revenue of $22.5-22.8M, an increase of 0.8% QoQ and 18.6% YoY at the midpoint. The forecast sees a further decline in gross margin and a bigger adjusted EBITDA loss of $5.6-6.2M.

	Q3 FY2022 (guidance)	Q3 FY2021	YoY (midpoint)
Revenue	$22.5-22.8M	$19.1M	18.59%
Gross margin	65.4-66.1%	72.4%	(665bps)
Adjusted EBITDA	($5.6-6.2M)	($2.7M)	–

Click to enlarge

Q3 guidance was arguably on the soft side, but VLN managed to offset this elsewhere. VLN raised its guidance for FY2022 after doing the same in the previous quarter. Revenue, gross margin and adjusted EBITDA are all expected to be better than before. From the Q2 earnings call:

“we are raising our guidance for the full year 2022. We now expect revenues to range between $89.1 million and $89.8 million, up from $86.5 million and $88 million provided in May. Given the ongoing expansion of our automotive revenues, we continue to expect to essentially double this part of the business from 2021.

We anticipate 2022 gross margins will be in a range of 68% to 68.5%. This new gross margin range is up from the previously guided range of 66% to 67.3%. We are also improving our projected adjusted EBITDA loss to be between $25.7 million and $24.3 million, significantly better than the prior range of $37.2 million to $35.5 million.”

A transcript of the Q2 FY2022 earnings call can be found here.

In addition, VLN expects to break even on an adjusted EBITDA basis by the end of 2023. VLN is still very much in the red, but the prospect of fewer losses in the not so distant future as suggested by the latest guidance was enough to keep the bulls ahead of the bears.

VLN is no bargain

The table below shows the multiples VLN trades at. VLN is in the red, even in terms of EBITDA with its less stringent requirements, which is why it does not have a multiple for several metrics, whether it is P/E or EV/EBITDA. In terms of sales, VLN is valued at 4.8 times forward sales with a market cap of $430M. Overall, VLN is not trading at sky-high valuations, but it is definitely not what you would call a bargain. VLN has potential, especially as it relates to the automotive industry, but you will pay a price to get in on that potential.

	VLN
Market cap	$429.80M
Enterprise value	$275.18M
Revenue (“ttm”)	$83.9M
EBITDA	($30.7M)
Trailing P/E	N/A
Forward P/E	N/A
PEG ratio	N/A
Forward P/S	4.80
P/B	2.36
Forward EV/sales	3.08
Trailing EV/EBITDA	N/A
Forward EV/EBITDA	N/A

Click to enlarge

Source: SeekingAlpha

Investor takeaways

VLN is closing in on its one-year anniversary as a publicly listed company. It also means there are now four quarterly reports available with which to evaluate VLN. VLN is basically a supplier of chipsets for high-speed video and data transmission links. In Q2, VLN reached a milestone with cumulative sales reaching 30M chipsets.

VLN’s technology forms the baseline for A-PHY, an automotive standard adopted by the IEEE. As such, VLN became the first company to release A-PHY compliant chipsets in late 2021. VLN is also the original developer of HDBaseT, a connectivity standard for audio-video transmissions. VLN is counting on having a first-mover advantage as it targets a range of markets, including automotive, industrial, medical imaging and others.

Of all the markets, the automotive market is arguably the most important one for VLN as it offers the most upside in terms of growth in the near term. VLN has already signed up one high-profile carmaker and it is looking to add additional ones. If VLN is to make inroads into the rapidly expanding market for ADAS and AD, then getting them to commit to using chipsets from VLN is of utmost importance.

However, while VLN may be on the verge of a rapid expansion, assuming it manages to get enough customers to commit, the reality is that VLN is mostly potential that has yet to be realized. VLN is not a profitable company at the moment, whether in terms of GAAP, non-GAAP or even adjusted EBITDA with its less stringent demands. VLN’s own projections only expect to break even in terms of adjusted EBITDA at the end of 2023. VLN is a speculative play at the moment. If people get in on VLN, it is because of what it could one day become and not so much what it is right now.

I am neutral on VLN. VLN is not necessarily expensive, but it is definitely not cheap either. VLN has potential, especially in the automotive market, but the challenge for VLN is to live up to that potential. VLN is very likely to face stiff competition in what is almost certainly to become a crucial market for a host of other companies. The ADAS and AD market will be heavily contested. VLN could succeed and eventually become a winner, but it could also go the other way. Success is not guaranteed.

The charts suggest the stock is currently up against resistance, which it has not been able to breach for all of 2022. The stock has been unable to break through despite repeated attempts, including in recent days, and while the stock could still succeed, the odds are against it. It’s true the stock has done better in recent months, being off the lows, but the overall trend is still pointing down.

Bulls may want to consider stepping to the sidelines with the stock just below what appears to be stiff resistance. If the stock breaks through, bulls can step back in. But if the stock does not and the stock reverses course, bulls will be glad to be on the sidelines. The stock has gone up in the last three months and a change of pace is probably to be expected.

Bottom line, VLN makes for a compelling story, but not everyone is likely to be convinced that long VLN is the way to go. There is still a lot that needs to be done if VLN is to live up to its potential. VLN could go either way. VLN may one day be a shoo-in for a long position, but now is not the time.