u-blox

Summary:

U-blox Holding AG (UBXN) presents an attractive investment opportunity in the semiconductor and IoT (Internet of Things) sectors, driven by its market-leading Positioning business and strong competitive advantages. The company is undergoing a strategic transformation, focusing on its high-margin Positioning business while divesting the underperforming Cellular business. This divestiture is expected to unlock significant value by allowing U-blox to concentrate on its core growth areas in autonomous driving, industrial applications, and asset tracking—sectors experiencing substantial secular growth. Despite facing short-term challenges like inventory destocking and revenue corrections, U-blox is poised for long-term growth. With a strong balance sheet, minimal debt, and an attractive valuation, U-blox has the potential to deliver significant upside once the divestiture is completed and the market refocuses on its Positioning business, which is set to benefit from increasing demand for high-precision GNSS solutions across various industries.

Core Business and Competitive Moats

U-blox designs and manufactures high-precision GNSS (Global Navigation Satellite System) semiconductors and modules for critical applications in automotive, industrial, and asset tracking sectors. The company’s Positioning business, which represents the high-margin, secularly growing segment of its operations, is a leader in the GNSS market, with an estimated 28% market share. U-blox's chips are integrated into autonomous driving systems, freight/asset tracking, and drones, and the company enjoys a high degree of customer stickiness due to the reliability and accuracy of its products. U-blox is already a supplier to 18 of the top 20 global car manufacturers, positioning itself at the forefront of the autonomous driving revolution.

One of U-blox's most compelling competitive advantages lies in its proprietary technologies, including its proprietary chipsets and intellectual property (IP), which represent a critical barrier to entry for competitors. The company's unique ability to integrate multiple connectivity technologies—such as positioning, cellular, and short-range communication—into one solution enhances its product value proposition and fosters customer loyalty. Furthermore, U-blox’s rigorous quality assurance process, ensuring near-zero defect rates, further strengthens its position as a preferred supplier in high-stakes applications, where failure could have dramatic consequences.

U-blox also benefits from high switching costs. Once its technology is integrated into systems, such as in autonomous vehicles or industrial robots, the cost of failure and the complexity of switching suppliers create long-term customer relationships, often lasting 5-10 years or longer. This creates a highly sticky customer base and reinforces U-blox's market dominance.

Financial Health and Management Strategy

U-blox operates with a conservative debt structure, featuring a low debt-to-equity ratio of 0.09, ensuring minimal leverage risk. Despite current headwinds, including inventory destocking from the post-COVID correction, U-blox’s balance sheet remains robust, with cash reserves representing nearly 20% of its market capitalization. The company’s focus on rightsizing its cost structure, including a recent restructuring to reduce R&D spend in its Cellular division, is expected to lead to operational efficiencies and margin improvements.

The leadership team, under the new CEO Stephan Zizala, has demonstrated a clear commitment to divesting the loss-making Cellular segment, which should further unlock value. U-blox’s recent steps to streamline operations, including reducing overheads and shifting R&D resources toward the higher-margin Positioning business, should drive greater profitability in the coming years. The divestiture of the Cellular division and its focus on its core Positioning business could lead to a re-rating of the stock, especially as the market refocuses on the company’s high-margin, secular growth segment.

u-blox

Recent Price: 67 CHF

Nov 27, 2024

Growth Drivers and Market Opportunity

U-blox's growth prospects are largely tied to the booming demand for its Positioning business in autonomous vehicles, drones, asset tracking, and industrial IoT applications. As autonomous driving technology continues to evolve, U-blox is well-positioned to capture a significant share of the high-precision GNSS market. The company has already secured over $100 million in design wins for Level 3 autonomous cars with leading automakers, and it powers key features in Tesla’s autopilot system. Additionally, U-blox’s chips are crucial to autonomous robots, drones, and a growing number of industrial applications, which is expected to drive market growth at a 13% CAGR.

Despite short-term challenges, including a decline in 2024 revenue due to inventory corrections, the underlying market for U-blox’s products remains strong, with secular growth trends in its end markets. As inventory destocking stabilizes and global demand for high-precision location data accelerates, U-blox is expected to return to strong growth, driven by its leadership in autonomous driving, industrial IoT, and other niche applications.

Inventory Destocking

U-blox is currently undergoing an inventory destocking process as part of the post-COVID market correction, which has temporarily impacted revenues. This is a common trend in the semiconductor industry, where companies must adjust inventory levels after a period of overordering during the pandemic. As global supply chains normalize and customer demand recovers, U-blox is poised for a rebound in sales and profitability. Below is the graph of U-blox's inventory levels over the past 10 years, showing the cyclical nature of its inventory adjustments:

Valuation and Upside Potential

Before the recent revenue decline, U-blox had an EV/EBITDA multiple of 14x based on its reported EBITDA of CHF 170 million in 2022. Assuming the company focuses solely on the Positioning business and applies the 14x EV/EBITDA multiple to an estimated EBITDA of CHF 100 million (post-divestiture of the Connect business), U-blox's market capitalization would be approximately CHF 1.4 billion, without taking into account the possible cash flow of the Cellular business division. This represents a significant upside from its current market cap of CHF 490 million, suggesting that a successful divestiture of the Connect business and a refocus on its higher-margin, secularly growing Positioning business could result in substantial valuation expansion. The sale of the Connect business could significantly boost U-blox’s market cap, providing a compelling investment opportunity with the potential for increased profitability and multiple expansion. If U-blox's EV/EBITDA multiple moves closer to the semiconductor sector average of around 30x, the upside could be much higher, offering further significant growth in its market value.

Risks

  1. Execution Risk on Divestiture: While U-blox’s strategy of divesting the loss-making Cellular business is compelling, the execution of this divestiture could face delays or challenges. The company may struggle to sell the division at a favorable price or face difficulties in managing the transition.

  2. Inventory and Supply Chain Risks: U-blox is currently experiencing a significant inventory destocking correction due to post-COVID market adjustments. The extent of this correction and its impact on near-term revenues could be larger than anticipated, prolonging the recovery and affecting profitability in the short term.

  3. Intense Competition: The semiconductor and GNSS industries are competitive, with large players like Broadcom, MediaTek, and STMicroelectronics vying for market share. The entry of new competitors or disruptive technologies, particularly from low-cost Chinese suppliers, could pressure U-blox’s pricing power and market position.

  4. Geopolitical Risks: As a global company, U-blox is exposed to geopolitical risks, especially considering the growing tensions around Chinese technology and the potential impact of trade restrictions on its operations. The company’s ability to manage risks related to supply chain disruptions, tariffs, and international trade policies will be crucial to its future performance.

  5. Technological Obsolescence: The rapid pace of innovation in the semiconductor and automotive sectors could potentially render U-blox's technology obsolete if the company fails to keep up with advancements in GNSS accuracy, wireless communication technologies, or autonomous driving solutions.

Catalysts

  1. Successful Divestiture of Cellular Business: The sale or wind-down of the Cellular division could unlock significant value for U-blox, allowing the company to fully focus on its high-margin Positioning business and improving its financial profile.

  2. Growth in Autonomous Driving and Industrial IoT: Increased adoption of autonomous vehicles, drones, and industrial automation technologies is expected to drive demand for high-precision GNSS solutions. U-blox’s leadership in this area positions it to benefit from long-term growth in these markets.

  3. Strategic Partnerships and Design Wins: U-blox's continued success in securing design wins with major automakers, as well as partnerships with Tier 1 suppliers in the automotive and industrial sectors, will drive its revenue growth and market share expansion.

  4. Operational Efficiency Improvements: The company’s ongoing restructuring efforts, including cost reductions and realignment of R&D resources, should lead to improved margins and profitability, particularly as the Positioning business scales.

  5. Recovery from Inventory Destocking: As global markets stabilize and inventory destocking is completed, U-blox is poised to return to growth in its core businesses, which could lead to a rebound in revenues and earnings.

Conclusion

U-blox offers a unique investment opportunity with a clear competitive edge in the high-growth GNSS and IoT markets. Its robust balance sheet, low debt, and significant competitive moats make it a resilient player in the semiconductor space. The company’s strategic focus on growing its Positioning business while divesting its underperforming Cellular segment sets the stage for future profitability and substantial value creation. Despite current market challenges, U-blox's long-term growth prospects in autonomous driving, industrial IoT, and asset tracking provide a solid foundation for significant upside, making it an attractive investment for long-term investors.

This report is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any securities. The information contained herein is based on sources believed to be reliable, but its accuracy and completeness cannot be guaranteed.

Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. For more information regarding Taler Capital Management investment approach and investment products visit www.talercapital.com