Nordic Earnings: Still Suffering From Low Visibility and Poor Forecasting; Valuation Lowered

Narrow-moat Nordic Semiconductor NOD reported a disappointing third quarter. Revenue was $135 million compared with expected guidance of $140 million to $160 million. The biggest hit, however, came from fourth-quarter guidance, with management guiding for a 30%-40% year-over-year decline when a few months ago it expected positive growth by the end of the year. We are reducing our medium-term revenue and margin forecasts and reducing our fair value estimate to NOK 145 from NOK 165. Shares are down 17% at the time of the writing to NOK 95, which we see as exaggerated despite the negative news.

In the recent quarters Nordic’s management has silently shut its $1 billion run-rate revenue guidance, which was supposed to be achieved by the second half of 2023. We did not give much credibility to this guidance given the cyclical adjustment happening in semiconductors during 2023 and Nordic’s poor visibility into the supply chain. In 2024, we expect a double-digit recovery in revenue and operating profit but still below the record levels seen in 2022. We only model revenue getting close to $1 billion in 2026 and assume long-term operating margins in the midteens.

Nordic’s financial guidance is weak, with this being the fourth time it changes its outlook in the past two years. In the earnings call, management said its distribution clients make frequent adjustments to their purchasing forecasts that make it difficult for Nordic to forecast revenue. We give some credibility to this statement as the CEO of Silicon Labs, Nordic’s main peer, also stated in July that the visibility and confidence of their clients is low and orders are done with short lead times. This can lead to sudden revenue variations during a quarter. We would like to see more cautiousness from Nordic’s management when guiding.

Despite the weakness, Nordic keeps a healthy balance sheet with $230 million in cash while it intends to reduce quarterly operating expenses by $5 million, a 10% reduction.