I’ve been getting a lot of reader questions about Dave Forest’s recent “informercial” pitch for Casey’s Strategic Trader ($1,750/yr, no refunds), and it looks like he’s pitching a different EV-related warrant investment than last time — so let’s dig in and get you some answers.

Back in October, we covered a very similar Forest ad pitch out about a different warrant opportunity — that’s no surprise, he and his Casey Research colleagues have been touting warrants in Strategic Trader for years (mostly in the mining sector in days gone by, since that’s where we used to most typically find publicly traded warrants, and Forest a geologist and always positioned himself as a mining guy, but as the SPAC explosion created thousands of new warrants he shifted to SPACs).

That previous pitch used Amazon as a hook, since there was a lot of attention on Amazon and its stake in newly-public Rivian (RIVN) at the time… but the basic idea was that you could buy warrants on a company that was doing the same thing as Amazon was doing with Rivian (building electric delivery trucks), and benefit in an even bigger way. That tease pointed at Lion Electric (LEV) and, more specifically, at the Lion Electric warrants (LEV/WS).

As you might guess, those warrants have fallen in price since Forest started teasing them back in October — almost everything that’s got any taste of “growth” or speculation in it is down since then, and Lion Electric shares have fallen about 40%, to trade at about $8. Somewhat surprisingly, the warrants have actually held up relatively well, they’ve only fallen about in half, to roughly $2. People clearly still love the speculative potential of warrants.

But we’re on to something new this time — it’s still related to electric vehicles, but it’s a supplier, not a company that’s actually building EVs. Here’s a little taste of the order form:

“I’ve zeroed in on a tiny company that’s essential to Tesla, GM, Ford, Chevy, Porsche, Mercedes, Audi, and Jaguar. All of these companies’ EV efforts directly rely on this tiny company.

“In fact, if you get in soon… I’m betting it will make you 49 years’ worth of gains in just 12 months.

“The best part? It only costs three dollars to get in. This opportunity is so big… so life-changing, that I’m holding the EV Superboom Summit tonight at 8 p.m. ET to get all the details to you….

“See the FULL story behind the huge warrant backed by the full force of the EV Megatrend AND legendary billionaire George Soros. You can make this play with about $3 right from your brokerage account. It has the potential to deliver 49X gains. DO NOT MISS OUT!”

That summit was about a week ago, on March 2, and I didn’t exactly rush to listen to it — there’s only so much misleading boasting that I can stand to hear, and for this particular one they didn’t provide a transcript so I had to listen to the whole damn thing to grab those clues for you. But I eventually ran out of procrastination and listened, so we can share those clues and get you an answer.

And I guess the urge to avoid this one was good in the long run, because at least I got my taxes done when I was looking for a more amusing way to spend my time.

Before we get into that, though, just make sure to start with a clear head. Get that “49X” nonsense out from between your ears, this is not a warrant that’s going to go from $3 to $150 and put you on easy street. That’s almost impossible — and the 49X is the same potential gain that this newsletter has teased before, so Forest is just doing the same thing he has done in the past, referencing that one of his past warrant speculations ended in a 49X gain, and saying it might happen again.

It shouldn’t happen with a SPAC warrant, though, which is almost certainly what we’re being teased with here — especially not if you’re paying $2-3 for that warrant, in which case the early redemption clause makes anything more than a 500-1,000% gain exceedingly unlikely, even if things work out extremely well for the stock. I’ll get more into that later on when I give a little “explainer” on warrants, for those who are new to these instruments, but just take that as your little buzzkill before we get started. I know you didn’t take the 49X gains potential seriously, but it still leaks into your brain and colors your thinking.

OK, so now we can move on to the stock and warrant being teased.

We’ve seen a lot of electric vehicle stocks go public over the past few years, some with huge fundraisings (like Rivian) and others through SPAC deals (like Lucid, Lion Electric and a dozen or so others), and major carmakers like Ford and GM have very publicly doubled down on their commitment to become EV leaders this decade. So which one might this be?

Well, since we’re dealing with warrants… we’re almost certainly being teased about a company that came public through a SPAC merger. That narrows it down a little… stocks like Rivian (RIVN) don’t have warrants, since they went public through the traditional IPO process, and some of the higher-profile SPAC-born stocks like Lucid (LCID) have already redeemed their warrants.

Is he pitching warrants on Lion Electric again as his favorite EV warrants? That was the best match last time he pitched the idea of EV warrants a few months back… but it seems like the story has likely shifted to focus on a new target. The basic spiel is focused on buying EV suppliers, not the EV brands themselves — so the battery makers and parts suppliers, not the names that are on the cars (like Tesla or Rivian).

And as we patiently wait through the “presentation,” tapping our fingers with impatience, Forest finally discloses that this company makes chips for electric vehicles. This should be a massive market, as cars were already becoming huge consumers of semiconductors (the supply chain problems for the automakers over the past year have been almost entirely about chip shortages), and Forest drops the line that “without these critical chips, an EV is nothing more than a tiny room to sit in.”

That’s pretty much true of every car right now, gas or electric, but Forest does also note that every EV needs about 2,000 individual chips, which is roughly double the number that you’ll find in a typical gas vehicle right now.

And we get a few specific clues about this company, beyond the fact that George Soros is a shareholder… we’re told that they are already selling chips, this is not a pre-revenue startup and they had revenues of about $30 million last year… with the CEO saying that they’re “ramping up to $500 million” and have $2.6 billion in orders for chips (over some undefined timeframe).

And when it comes to Soros, the well-known billionaire trader has indeed added some EV exposure to his portfolio of late, including a big purchase of Rivian, presumably as part of the IPO (I bought shares of RIVN when I got an allocation to the IPO, too, but took my profits a while back and don’t own shares now).

So we can get at this in two ways — from Soros’ disclosed holding, and from the couple little clues Forest drops. The largest position that Soros reports (as of his last 13f) in a stock which also has warrants trading and is related to electric vehicles, is Indie Semiconductor (INDI), a fast-growing automotive chip supplier.

And that’s also the best match for the clues, sez the Thinkolator — INDI had $32 million in revenue for the year ending last September, though the full 2021 number ended up being $48 million after they reported their annual results a couple weeks ago (perhaps Forest pulled his data before the Feb. 22 earnings report). And yes, the company has forecast that they will reach $500 million in revenue — technically $501 million, to be achieved in their 2025 fiscal year.

Now, to be fair, the “fast growing” part is largely due to the fact that they are starting from almost nothing, with only one product in production right now — but they do say they have some meaningful design wins and a good pipeline for possible future wins that could dramatically increase their revenue over time.

And that may be true, the product development lifecycle for a new car model is very long, and it’s hard to get into those products. Automakers don’t like to take chances on startups or new technologies, not when they’re going into a car that will carry their brand (and need their support) for more than a decade… so if INDI has some design wins, and their products are already “validated” as matching the quality and reliability standards that automotive customers demand, that’s a good start.

Indie Semiconductor has also made some moves just since going public with its SPAC merger (they merged with Thunder Bridge II last Summer, in a deal that was announced in late 2020) — they acquired Teraxion late last year, which gave them some exposure to integrated photonics and some other new capabilities to add to Indie’s strength in power management and system-on-chip development, and they also bought the Symeo radar division from Analog Devices (ADI), so they are at least trying to build out the business and expand into more areas. They do have some big ambitions in getting into AI processing and auto safety systems, including a just-launched chipset for LiDAR systems, and into business like EV vehicle recharging systems, but we should be clear: What they’re mostly making revenue from right now are chips that don’t deal with those key safety areas, they’re mostly selling integrations with Apple CarPlay. They do have design wins in wireless charging and power management, and I’m not sure whether that’s accessory power or actual EV motor power, but their revenue today mostly comes from chips for infotainment systems and cabin LED lighting, primarily “user experience” stuff. A lot of their growth dreams are built on LiDAR systems and AI, but they’re not really in that business in a meaningful way just yet when it comes to actually making sales, getting design wins, and generating revenue.

The shares have not had a great run since the go-public merger last summer, perhaps no surprise, and INDI has now lost about 25% of its value since the day the merger was completed. That’s worse than the performance of most of the the comparison companies they call out in their SPAC presentation (SiTime (SITM), Ambarella (AMBA), Semtech (SMTC), Power Integrations (POWI), Allegro Microsystems (ALGM)), but more or less on a similar trajectory.

Sometimes it’s worthwhile to go back and look at the original SPAC presentation when considering these kinds of companies — that’s on file with the SEC here, and the key number they highlight often is their “strategic backlog,” which seems to be the amount of revenue they expect to earn from deals that have been made (in total, not annually). That’s where the $2.6 billion that Forest cites as “on order” comes from — they’re a long way from fulfilling that “strategic backlog” right now, they had about $50 million in revenue last year and will probably double that this year, then double it again in 2023 (reaching $240 million), assuming the analysts are good guessers. Though maybe they’re not trying so hard on the guessing, those numbers are pretty similar to the projections in the initial SPAC presentation, too.

Like most SPAC mergers, the valuation argument is based largely on the 2025 numbers — by which time they hope to have meaningfully expanded into ome new product areas and reached that teased $500 million in revenue. Half of that revenue is somewhat predictable, they say, it being from business that they’ve already “won” with their designs, though there’s always a lot of variation — you can get a design win, and that is an important step and gives some predictability to the business for the coming years, but it doesn’t come with a guarantee that a car model will achieve popularity or ship a certain number of vehicles.

So yes, their ambition is to be a key supplier to EVs, but right now they are mostly a supplier of chips for infotainment systems in both gas and electric vehicles, with a good share of the market for chips that enable Apple CarPlay integration. They are not profitable right now, but revenue is growing quite quickly, and if the chips fall in the right way (sorry), they could be profitable in a couple years, with rising revenues and rising margins. I don’t have any great insight into whether they’ll get design wins in the new areas they’re pushing, to supplement their growing infotainment order flow, but I will say that the management team gives me some confidence — they were started by a few alums from Skyworks Solutions and Axiom Microdevices (since sold to Skyworks), so that’s a good nucleus, and they have experienced folks in leadership from a lot of other key automotive chip suppliers, including Motorola, Broadcom, Qualcomm and Infineon. The hope is that they can leverage their early design wins to get into more lucrative systems like power management and AI/driver safety systems, and it sounds like a rational strategy and a good team. That’s enough to tempt me a bit, at what is a fairly reasonable valuation for an emerging growth chip designer if they can stay on their trajectory, and I am encouraged that they have bought some businesses to round out their product offerings.

Risks? There are plenty, of course — they might not get the design wins they hope for, and if they don’t grow as fast as they anticipate it’s unlikely the market will continue to be willing to pay 15X sales for the stock, semiconductors have historically been a very cyclical market, so if things turn down they can turn down fast and hard. It may be different this cycle, since chips are still in such a shortage situation for most companies, and demand remains high in the automotive space as EVs continue to take share and new models are unable to get enough chips to meet consumer demand, but we shouldn’t be super confident about it being different — car sales can collapse quickly in a recession.

And it’s probably a risk that they’re a tiny player, at a time when it’s sometimes difficult to get access to semiconductor production capacity — they’re fabless, like most US chip designers, so they design the products but they have to outsource the manufacturing to fabrication facilities, like those owned by GlobalFoundries or Taiwan Semiconductor, and I suspect that when push comes to shove, larger customers like NVIDIA or Advanced Micro Devices get much better treatment from the big fabs than the little guys do. I don’t know who INDI partners with for manufacturing.

So… risky, interesting, small and growing very fast, and with a good management pedigree. Maybe worth your time to research and consider.

But it’s not the stock Dave Forest is touting, it’s the warrant — so in case warrants are new to you, let me offer a little background.

If you don’t know what warrants are, just think of it this way — they trade like stocks, but they are mostly like individual call option contracts (just without the standardized terms of options). A warrant, like a call option, gives you the right to buy a stock at a set price (the “strike” price), at any point before the expiration date. If you want to do that, you would “exercise” the warrant — though often people don’t bother to exercise their warrants, which takes some communication with the broker and sometimes a fee, they just sell them before the expiration date (hopefully at a profit). Warrants do not obligate you to do anything, they are an option — you can choose to exercise them or not. And there are some differences in the basic warrant structure, including cases where you have to exercise two warrants to get one share of stock or something along those lines, but they’re typically 1:1 — exercise one warrant, get one share (unlike a call option contract, which represents a 100-share block).

Most US-listed warrants are associated with SPAC financing deals, and they have become somewhat standardized — almost every SPAC deal includes a warrant, and almost every time it’s a five-year warrant that gives you the right to buy the underlying stock for $11.50, and the clock starts ticking the day that the SPAC business combination is finalized. So in this case, Indie Semiconductor has warrants that are publicly listed and traded, and each warrant (ticker INDIW for most platforms, some will be INDI.WT or INDIWS or INDI/Ws or some variation) gives you the right to buy a share of INDI for $11.50 anytime before July of 2026.

That sounds impressive, right? And it is, five-year warrants are a rare and underappreciated way to get long-term leverage in the market (call options are usually only available for a maximum of one or two years) — the only real problem, aside from the fact that more leverage comes with the fact that you’re facing a much higher risk of a 100% loss, is that they’ve gotten extremely popular over the past couple years of SPAC mania, so the prices are a lot higher than they would have been before 2019 (SPACs have been around for decades, but it used to be that there were a half dozen a year and people mostly ignored them — lately they’ve been super-sexy, and although the bloom has come off the rose a bit over the past six months, there are still about 1,000 active SPACs looking for or working on a deal).

That popularity and generally higher pricing for warrants, combined with the fact that most SPACs have an early redemption clause, effectively puts a ceiling on the returns you are likely to get from a warrant. It’s extremely unlikely that SPAC warrants that are well above a dollar can go up 49X… even if the stock does exceptionally well and goes up more than 10X in value. That would mean going from, say, $2 per warrant to about $100 per warrant, which you’d imagine might be possible (however unlikely) if your little company captures the attention of investors and goes into a speculative mania, going from $5 or $10 or whatever it is to $120, particularly since the nice long five-year term of the warrants gives a lot of upside optionality… unlikely, but it has happened before. But the unfortunate thing is that you will almost certainly lose the leverage of those warrants along the way, because SPAC warrants have that early redemption “release valve” that generally prohibits those kinds of gains for the warrants.

Typical SPAC warrants, including this one for INDI, have an early redemption clause that lets the company redeem your warrants anytime the stock is trading above $18 for 20 days in a 30 day period. They don’t have to do that, but they can, and companies are generally incentivized to get rid of the publicly traded warrants as soon as they can, to reduce the dilutive impact of all the new shares those warrants represent. So it’s not automatic, but the Board is usually inclined to push for the early redemption or exercise as soon as its available — when that share price trigger is hit, they can typically either force a cashless exercise and give you shares in place of your warrants if the company doesn’t need cash (in some relative approximation of fair value), or, if they want you to really redeem the warrants and they could use your $11.50, they can just announce an accelerated redemption and redeem each warrant that you don’t exercise for a penny, effectively forcing you to exercise or sell your warrant.

What does that mean in practice? Well, INDI warrants right now trade for about $2. The warrants give you the right to buy the shares for $11.50 for 4-1/2 years, so that would mean you’re effectively getting exposure to any movement the shares make above $13.50 (the $2 you paid for the warrant, plus the $11.50 you’d have to pay to exercise it and get a share). The stock is at $7.50 right now, so that means the warrant is “out of the money” — you wouldn’t redeem it now, because the right to buy the shares for $11.50 today is not worth anything, all of the value comes from the future potential of what might happen over those four and a half years.

If the shares double to $15, then the warrants would be “in the money” and would be worth at least $3.50 if you wanted to exercise them immediately (probably more, assuming there’s still time before the expiration date, people will typically pay for time). That’s the level at which the returns from the shares and the warrants would likely be roughly equivalent, both would double your money, though the risk is much higher for the warrants (the stock is very unlikely to lose 90%, but the warrant easily could if the stock falls further from here and investors lose any hope for future growth). If the stock stays between $7-15, you’re likely to be better off with the stock… if it goes above $15, you’re likely to be better off with the warrant.

But then if it goes past the $18-20 range, the leverage starts to be reduced because of that potential for early redemption. If the stock surges and people get excited and drive it to $25, the warrant should follow and go to something like $15, providing great leverage (that would be a 250% gain for the stock, 650% for the warrant)… but if it stays at that level it’s almost certain that it will be redeemed, which means that the returns after that early redemption point (assuming you pay attention and exercise your warrants, or participate in a cashless exercise), will effectively match the stock’s return. There is some time lag built in, the stock has to be above $18 for 20 out of 30 trading days, and then they have to wait three days after that to call for early redemption, and give some time for warrant owners to act, so it’s possible to get crazy movements during that month or so when this is happening that provide even higher returns for warrant holders… but generally the ceiling for a typical SPAC warrant these days that you buy for more than one or two dollars is going to be something like 500-1,000% if things go very well. Not bad, for sure, but not 4,900%.

Yes, some warrants have gone up 49X when bought very cheap… but they’re not generally SPAC warrants, and in the rare cases where SPAC warrants have surged that high, it was in part because they were bought for pennies during of a bout of pessimism — if you buy a SPAC warrant for 20 cents, a 49X return is firmly on the table even if other investors don’t think it’s likely, if you pay $2 or $3, not so much (it’s just math — a 49X return for a 20-cent warrant would mean the warrant goes to about $10, which happens all the time when SPAC stocks get near or above $20 — a 49X return for a $2 warrant means the warrant goes to $100, which shouldn’t ever happen with a SPAC… maybe it has, during some lunatic trading if the SPAC rose 1,000% in less than a month, and therefore faster than the redemption clause is able to kick in, but even with the ridiculous SPAC trading of 2020 and early 2021 I don’t remember seeing that happen).

And I’ll close with my typical note of caution when it comes to warrants: They are not passive investments, you have to pay attention. Do note that warrants can expire worthless or, if they hit the early redemption clause, be redeemed for a penny even if the stock is trading above the exercise price. Brokers won’t automatically exercise warrants for you like most brokers will with options contracts, so don’t forget to take action (sell or exercise if it’s “in the money”) before the expiration date, whether that’s the original expiration date or an accelerated early redemption date. Having an in-the-money warrant expire and become worthless just because you forgot would definitely be a bummer, and it happens.

So there you have it, another Strategic Trader pitch for a SPAC warrant, in this case one that’s somewhat related to electric vehicles. Is Indie Semiconductor a stock that appeals to you, or a warrant that you think is worth the gamble? Have other favorite warrant plays that you think have gotten appealing during the washout we’ve seen in tech stocks over the past four or five months? Questions or comments about warrants in general? Let us know with a comment below.

P.S. And, as always, if you’ve got any experience with Casey’s Strategic Trader service, inquiring investors wanna know — is the newsletter worth it? Share your thoughts on our Strategic Trader review page. Thanks!

Disclosure: Of the stocks mentioned above, I own shares of and/or call options on Advanced Micro Devices and NVIDIA. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.