Melexis Shares Offer Attractive 40% Upside; Decreasing Our Fair Value Estimate to EUR 100

We believe narrow-moat Melexis MELE shares offer an attractive buying opportunity at this point. Although we are decreasing our fair value estimate to EUR 100 from EUR 105 after adjusting our medium-term forecasts, shares offer 40% upside for long-term investors who are willing to endure a few quarters of uncertainty. Melexis is trading at 13.0 times the 2022 EBIT and 11.3 times the last 12 months’ EBIT.

Shares are down 30% since Aug. 1 and down 15% in the past three weeks, in line with other analogue semiconductor companies as the market is anticipating a potential cycle change. Another reason for the selloff might be a read-through from recent Onsemi earnings. Shares of Onsemi sold off by 20% on Oct. 27 due to weak guidance for the fourth quarter, including mid-single-digit sequential revenue declines in automotive. However, we have also seen positive comments from other automotive chip companies, with STMicroelectronics and Infineon Technologies confirming double-digit growth for 2024 even after flat car production. During its Oct. 25 earnings call, Melexis management confirmed that its automotive supply/demand balance remains healthy for now.

We believe Melexis shares are especially attractive to buy during cyclical downturns. Melexis experiences the “bullwhip effect”—when there are swings in end-market auto demand the effect is more pronounced when a company is in the upper part of the supply chain, which is where Melexis is. After cyclical contractions, a cyclical upswing happens and sales and profits rebound strongly. Melexis has an almost debt-free balance sheet, allowing it to comfortably steer its way through cycle troughs

Our forecast assumes a high-single-digit revenue CAGR over the next decade and 24%-27% EBIT margins as chip content per car keeps growing. We also assume a double-digit cyclical sales decline in 2025 with a strong recovery in 2026 and 2027. Shares were up 7% on Nov. 2, in line with other semiconductor stocks that have oversold recently.