Melexis - Part II
Key Risks
Welcome back! Last time, we explored the compelling story of Melexis—a tale that, at first glance, seemed almost too good to be true. But as with any story, there’s another side worth examining—the risks. That’s exactly what we’re diving into today. In this shorter follow-up, we’ll unpack four key risks facing Melexis: competition, customers, suppliers, and people. We’ll keep it straightforward, highlighting potential impacts without overcomplicating things. If you’re interested in more common risks, one of our previous reads tackles the most important ones!
Think of this as the other half of the puzzle. If you only read this article, you might walk away thinking Melexis is all risk and no reward—just as reading the first one alone might make it seem flawless. The truth, as always, lies somewhere in between. So grab your coffee, get comfortable, and let’s take a closer look at the challenges Melexis faces!
Fierce Competition
Melexis isn’t operating in a vacuum—it’s up against some serious heavyweights. In the U.S., Texas Instruments dominates the market, while over in Europe, Infineon leads the pack, pulling in around €8.5 billion in automotive sales alone. It’s no surprise that a market offering high margins and strong demand has drawn plenty of players—Economics 101, right?
But here’s where things get interesting. Many of Melexis’ competitors follow a different playbook. Industry giants like Texas Instruments and Infineon manufacture their own chips, unlike Melexis, which operates on a fabless model—designing chips but outsourcing production. This approach gives Melexis more flexibility and shields it from the risks tied to expensive manufacturing facilities.
On the flip side, the big players have a clear advantage: economies of scale. They can churn out both digital and analog chips (Melexis’ specialty) and leverage their massive investments in production facilities to boost margins—at least when demand is high. But here’s the catch: when demand slows, those big investments turn into big liabilities. That’s where Melexis’ leaner approach shines. By avoiding these heavy upfront costs, they’re less vulnerable to sudden market shifts.
Take Infineon, Melexis’ biggest competitor, as a prime example. In their 2024 half-year report, they revealed a 6-percentage-point drop in gross margins compared to the previous year. Ouch. Melexis also felt the pinch, but their gross margins only dipped by about 2.5 percentage points. It’s a great example of how those massive upfront bets on growth can backfire if the revenue doesn’t keep up. For Melexis, their more nimble strategy pays off when the market gets rocky.
So while Melexis faces tough competition, its unique business model offers both advantages and safeguards in an unpredictable market.
Customer Concentration
Let’s talk about one of the bigger risks Melexis faces—customer concentration. After half of 2024, their 10 largest customers accounted for 43% of total revenues, with the biggest one alone contributing 13%. That’s a lot of eggs in just a few baskets.
Why does this matter? For starters, it gives those key customers significant negotiating power, potentially limiting Melexis’ ability to raise prices. Even more concerning, if one of these major clients were to hit financial trouble—or worse, go bankrupt—the ripple effect on Melexis could be substantial.
Looking at the bigger picture, the story stays pretty focused: a staggering 90% of Melexis' revenue comes from the automotive world—a famously cyclical industry. When the going is good, automakers pour money into big contracts and ramp up production. But when the economy stumbles, they slam the brakes, cutting back on spending and scaling down operations. We’ve seen this firsthand with Melexis’ 2024 revenue outlook. Let’s face it—2024 has been rough for car manufacturers, especially those still figuring out their EV game (Volkswagen, anyone?). Melexis felt the squeeze too, revising their revenue forecast from €1 billion to €935–945 million. That’s about a 6% drop!
Now, here’s the silver lining. Modern cars, especially EVs, are loaded with chips, making Melexis’ products more essential than ever. But even that doesn’t make them immune to industry slowdowns. If car sales drop, manufacturers build up inventory, and demand for components like chips takes a hit.
The takeaway? Melexis isn’t just tied to one sector—it’s also closely tied to a handful of key customers within that sector. For investors, that means understanding and accepting the cyclical rollercoaster that comes with the territory. It’s not necessarily a dealbreaker, but it’s definitely something to keep in mind before jumping on board.
Supplier Dependence
Let’s dive into another fascinating (and slightly tricky) aspect of Melexis—its relationship with its main supplier, X-Fab. On paper, the two companies are completely independent. But here’s the catch—the same two major investors hold the largest stakes in both companies. So, while they may not officially be related, in practice, they often operate like they are.
This setup has its perks. It’s a form of vertical integration, with Melexis designing the chips and X-Fab manufacturing them. In theory, this should lead to lower production costs and give Melexis a competitive edge—a solid moat, right? Well, not so fast.
The problem is, these are public companies, and their financials are separate, so what shows up on each company’s P&L statement actually matters. Unlike truly affiliated companies, where “intercompany sales” can be smoothed out, Melexis and X-Fab might end up in pricing disputes—each trying to protect its own bottom line. And if that’s happening (which is incredibly hard to verify), the supposed moat of vertical integration could disappear entirely.
So while this supplier relationship could be a strength, it’s also a vulnerability. It’s a fine balance—and one worth keeping a close eye on.
Brain Power
Finally, let’s talk about what I like to call “Brain Power”—arguably one of the most underrated risks for a company like Melexis. In businesses driven by innovation and design, success hinges not just on products but on people—the smart, talented, and hardworking individuals who bring those ideas to life.
Melexis is in a unique position. While it operates as a service-oriented company (designing chips), it ultimately delivers physical products (semiconductors). But make no mistake—its real selling point is cutting-edge technology and innovation. And here’s the thing about innovation—it doesn’t happen without top-tier talent.
Hiring the right people is tough, but keeping them? That’s the real challenge. For Melexis, holding onto its talent isn’t just a checkbox—it’s a game-changer. When employees stick around, it builds momentum and fuels innovation. But if key people start leaving? That’s when the real trouble starts. Not only does the company lose their skills and experience, but competitors gain them—a double hit that stings even more.
Luckily, Melexis seems to be holding its ground with a solid retention rate of 84%. That means 84% of the employees who started 2023 with the company were still there by the end of the year. A higher retention rate usually signals a happy workforce—people who feel good about their roles and the company overall. But retention isn’t the only indicator of employee satisfaction.
That’s where tools like Glassdoor come in (Milan already touched upon this). It’s one of the best ways to go beyond polished PR statements and see what employees really think about the culture, management, pay, and more. It’s like a peek behind the curtain.
Spoiler alert: Melexis’ Glassdoor reviews are okay—but not amazing:
And that’s something to keep an eye on. After all, talent isn’t as easily replaceable as machinery. Lose too many key players, and Melexis’ core strength—innovation—could be at risk.
Of course, with AI advancing rapidly, maybe in the (near) future this risk won’t matter anymore. But for now, Melexis’ ability to attract and retain brilliant minds remains a very important factor—one that investors should take seriously.
Final Thoughts
So, there you have it—Melexis in a nutshell. We’ve uncovered four key risks: (1) Fierce Competition, (2) Customer Concentration, (3) Supplier Dependence, and (4) Brain Power. As with any investment, higher risks can mean higher rewards—but only if the payoff justifies the gamble.
For some investors, a little extra risk might be worth it, but whether Melexis fits that bill? Well, that’s something we’ll dig into in the next articles.
With this piece, we’ve wrapped up the story of Melexis—covering both its potential and its pitfalls. But we’re not done yet! Next, we’ll dive into the balance sheet to see if the numbers back up the story we’ve built so far. And after that? The valuation—where we put our assumptions to the test and, best of all, figure out what kind of returns we might expect.
Stay tuned for Sunday’s article—I promise it’ll be worth it!