Infineon Technologies Stock: Resilient Pricing And Volume Recovery In H2 2024 (IFNNF)

Here at the Lab, we have a good grip on EU semis. Following STMicroelectronics’ 20% stock price decline and a Q3 supportive comment, today we are back-checking Infineon Technologies AG (OTCQX:IFNNY) (OTCQX:IFNNF). Our internal team has a long-standing buy rating on the company based on MACRO and MICRO upside. To support our investment call and post Q4 and Fiscal year 2023 results, we believe the company has a recovery upside and a resilient pricing power to be priced in. For a comprehensive understanding, we suggest checking our previous publications where we emphasized 1) Infineon index underperformance (vs. the PHLX Semiconductor Index) and 2) Why the Company is a buy.

Q4 and FY 2024 update

Very briefly, in Q4, the German semi-company reached €4.15 billion in sales with a core operating profit of €1.04 billion and a margin of 25.2%. Looking at the Fiscal Year, top-line sales reached €16.31 billion, and the company was up by 15% vs. last year. Adjusted earnings per share came to €2.65, up 35% versus the prior year, and adjusted FCF exceeded €1.5 billion.

Source: Infineon Technologies Q4 results presentation – Fig 1

Today, we are not going through (again) our supportive buy rating upside; the key to highlight is Infineon economic moat and business resiliency. There are at least four forward-thinking take to consider for our estimates:

1. In detail, post results, the company expects a challenging 2024 start, and despite that, Infineon provided new Fiscal year guidance at €17 billion with a plus 4% revenue growth every year. Q1 2024 is forecasted to be down 4% vs. last year, and on the Q&A analysts’ call, the CEO pointed out a modest quarterly growth in Q2 2024, implying that Q1 2024 will mark the bottom and a strong recovery is now expected in H2. This is key for our team. Indeed, Infineon continues to outperform its closest peers thanks to its product exposure;
2. Even if the company presented margin headwinds, looking ahead, Infineon anticipates a Gross Margin and a core operating margin of 45% and 24%, respectively (Fig 5). This year, the company closed with a margin of 47.3% and 27%. Cross-checking this margin compression, the main negative drivers are low single-digit pricing declines, higher underutilization charges (from €425 million to €600 million), and lower volumes. Here at the Lab, we believe the company displays a supportive near-term resiliency, especially taking into account the macroeconomic environment and the ongoing industrial slowdown. Going to the divisional level and considering our expertise in the automotive segment, we should highlight the following: the Automotive division represents 51% of the company’s 2023 revenue (Fig 1), and we continued to see an EU volume recovery opportunity (This is also based on our supportive buy on Stellantis, VW & Renault and the latest positive volume trend – Acea data). In detail, 2) in Q4 2023, the segment was up 12% yearly, and there is an indication for a plus 25% in Q1 2024, and 2) the division is resilient to price (in the call, the CEO reiterated this statement). Therefore, we believe that investors are now reassured. In addition, Infineon is moving on into the Silicon Carbide segment (Fig 3). The company targets a 50% growth; therefore, we arrive at a sales line of €750 million in 2024 with internal estimates of >€1 billion in 2025. This should help to alleviate concerns raised when ON missed its Fiscal Year 2023 target by €200 million;
3. While the company acknowledged rising Chinese competition in the market, they are also confident in Infineon’s strong positioning and solid sustainability. In the medium-term horizon, the company has a diversified range of product portfolio and long relationships with OEMs;
4. following Cypress and Imagimob’s acquisition, the company continued its inorganic expansion in the IoT division. In the quarter, Infineon acquired 3db Access to strengthen its portfolio further. With this new deal, the company will accelerate IoT growth, leveraging opportunities in the Ultra-Wideband market, which has a 13% CAGR until 2028 (Fig 4);
5. Looking at the valuation, Infineon is currently trading at a price-earning of 12x on our 2024 estimates. This valuation is unsupportive of the company’s historical average of a P/E20x.

Fig 2

Fig 3

Fig 4

Forecast changes and Valuation

Post FY 2024 results, we are guiding lower sales and estimating NTM revenue of €16.3 billion. Our core operating profit is currently set at €3.8 billion (from FY 2023 results of €4.4 billion). Due to lower expected sales in Q1 and Q2 2024, we decided to reduce the company’s EPS by 3% and leave our estimates beyond unchanged. In our numbers, considering the FCF evolution and no inorganic acquisition, Infineon will be cash-positive for €500 million. This includes a higher dividend per share proposal (2023 DPS at €0.32 vs. 2024 DPS proposal at €0.35). Indeed, the new dividend payment will move from €417 million to €456 million. Considering lower sales and a lower margin, we reduced our NTM EPS to €2.21, and we leave unchanged our 2025 EPS at €2.6. Continuing to apply a P/E of 20x, in line with the company’s historical average, we derive a 12-month valuation of €44.2 per share, which a reverse DCF also backs with a WACC of 9% and a growth rate of 2.5%. Our internal team continues to see an upside from here, and we reiterate our buy.

Downside risks include fluctuations in the semiconductor cycle, automotive recovery, lower production volumes, CAPEX utilization rate, value destruction acquisitions, potential trade war implications between China and the US, disruptions from new forthcoming technologies, and FX fluctuations, particularly the $/€ exchange rate.

Fig 5

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