We not too long ago launched our revamped Nanalyze Disruptive Tech Report that’s solely accessible to annual subscribers. It’s now leaner however meatier, grouped by know-how themes underneath every of the 12 tech classes – like Electrical Autos underneath Inexperienced Expertise. In principle, that ought to make it simpler for retail buyers to seek out succinct analyses on their favourite tech themes. This works fairly effectively once we cowl pure-play shares however can get a bit messier once we think about pick-and-shovel performs on a theme.
An instance that’s particularly pertinent to at this time’s article is an organization we not too long ago lined – Wolfspeed (WOLF). The Durham, North Carolina firm focuses on manufacturing semiconductors utilizing silicon carbide (SiC), a fabric particularly suited to purposes that require larger effectivity and energy density chips similar to electric vehicles (EVs). Wolfspeed feels like an organization we might usually cowl underneath Computing or Synthetic Intelligence, but our curiosity in WOLF inventory is definitely as a inexperienced tech inventory. Huh?
Investing in EV Chips
The writing is on the roadway: Electrical autos are the longer term, even when that street is slightly bumpy proper now, particularly after Tesla (TSLA) simply introduced it will minimize 10% of its workforce amid slumping gross sales. Its greatest competitor, China’s BYD (1211.HK), is in some methods a extra compelling long-term funding within the EV theme, with added publicity to rising markets and the world’s second largest financial system. Whereas each of those EV corporations are compelling, there’s additionally one other angle to take right here – chips. We’re within the midst of investigating a pick-and-shovel play on electrical autos by investing in EV chips.
These elements are important to EVs, in addition to fashionable autos, particularly a sort of chip often called an influence semiconductor. Energy chips are specialised built-in circuits designed to deal with excessive voltages and huge currents, making them appropriate for energy electronics purposes similar to residence home equipment, cars, and industrial equipment. Supplies like SiC and gallium nitride (GaN) are seen as the way forward for energy semiconductors as a result of they provide higher efficiency, larger effectivity, and better energy density in comparison with silicon. That is notably the case in inexperienced tech markets like EVs and renewable power techniques.
Therefore our curiosity in Wolfspeed, which certainly represents important publicity to EV chips, in addition to an rising materials know-how like silicon carbide. The draw back is that administration has been constantly lacking steerage and burning enormous piles of money attempting to ramp up manufacturing at its spiffy new silicon carbide manufacturing unit in New Yawk. That’s had a knock-on impact throughout gross margins and different key indicators of economic well being, which we don’t see bettering any time quickly.
About Infineon Inventory
So we’re transferring on to Infineon Applied sciences (IFX.DE), a $43.5 billion German firm that additionally focuses on manufacturing energy semiconductors to fulfill demand in inexperienced power sectors like electrical automobiles, charging stations, and renewable power techniques. And, like Wolfspeed, Infineon is quickly scaling manufacturing to seize extra of the SiC market. Is Infineon inventory the perfect wager for EV chips?
To reply that query, we have to perceive a bit extra in regards to the firm and the way it generates income.
A quick historical past of Infineon Inventory
Till 1999, Infineon was a subsidiary of Siemens AG, the German know-how conglomerate with a historical past that dates again to the 1840s. Its founders – together with, after all, a man named Siemens – commercialized a brand new kind of telegraph and by no means seemed again. Title a decade and Siemens was doubtless concerned within the newest and best know-how on the time, from electrical streetlights and electrical tramways to electrical elements for Nazi demise camps to washing machines and pacemakers. And, after all, laptop {hardware}, together with a short-lived enterprise within the Nineteen Seventies with Advanced Micro Devices (AMD).
Administration reportedly determined to spin off Siemens Semiconductors due to the heavy volatility and losses that the division had suffered in 1998, regardless of posting $3.8 billion in gross sales – again when a billion {dollars} was price one thing. It was reportedly the most important high-tech spin-off in European historical past on the time. The brand new firm, Infineon, IPO’d in 2000 throughout the identical yr when the dot-com bubble peaked. No matter occurred through the succeeding years is misplaced within the mists of time, so within the curiosity of time, let’s quick ahead to latest income historical past:
A few issues to notice: Numbers are in euros, so final yr the corporate had revenues of about $17.3 billion in U.S. bucks. (We’ll be quoting U.S. {dollars} all through however the charts are in euros.) The proportion represents the rise in web revenue (referred to as phase outcome), not income progress, which was about 15% between 2022 and 2023. (Infineon administration famous that international semiconductor gross sales over the identical interval are estimated to have shrunk by round 13%.) Whereas Infineon profiles extra as a worth inventory – similar to being worthwhile and a steadily rising dividend over the past decade – the latest income surge suggests the corporate has hit one other gear.
How Does Infineon Make Cash?
Whereas historical past is enjoyable, we’re primarily right here to be taught extra about how the sausage is made – how does modern-day Infineon generate income. Being German, administration has made that job fairly simple for us by methodically breaking income down into 4 segments after which into the 4 predominant merchandise inside these income segments.
We instantly see that automotive accounts for greater than half of the corporate’s revenues. Sliced and diced by product class, energy semiconductors account for 55% of revenues. To grasp the large image, let’s briefly introduce every of the segments:
- Automotive: Infineon claims to be the market chief in automotive semiconductors (extra on that shortly). Its merchandise and options cowl powertrain, power administration, connectivity, infotainment, security, and information safety.
- Inexperienced Industrial Energy: Previously referred to as Industrial Energy Management, this phase displays the corporate’s laborious pivot to inexperienced industries like renewable power. Energy semiconductors dominate right here, particularly primarily based on SiC know-how. Functions embrace inverters for renewable power techniques, industrial energy provides, and EV charging infrastructure.
- Energy & Sensor Programs: This phase additionally focuses on energy semiconductors, together with radio frequency (RF) and sensors, for numerous purposes like energy provides, lighting techniques, cell units, and renewable power options.
- Linked Safe Programs: Because the title implies, this phase is targeted on Internet of Things (IoT) options for making certain safe connectivity for sensible residence home equipment, IT gear, shopper electronics, and extra.
Market Chief and Increasing Markets
We typically solely put money into market leaders, and we discover that Infineon owns about 14% of the automotive semiconductor market. That’s ok to qualify because the chief in a market valued at greater than $69 billion in 2023, in accordance with analysis by TechInsights. The corporate can be the lead producer of energy semiconductors at greater than 20% of that market.
As a significant producer of a key know-how for enabling not solely electrification of autos however the power grid, Infineon actually checks the pick-and-shovel field for EVs and different inexperienced applied sciences. The sizable publicity to IoT is an added bonus. Final yr, Infineon acquired a Swiss startup, 3db Entry, to spice up the corporate’s capabilities in energy-efficient ultra-wideband (UWB) know-how. UWB tech can be utilized to exactly decide positions and distances whereas defending in opposition to sign interference. IoT purposes embrace safe entry to autos and buildings, indoor navigation, and presence detection of individuals in rooms.
Different future income progress drivers embrace synthetic intelligence (after all) and information facilities. Infineon acquired a small Swedish startup, Imagimob, for its platform to allow machine studying options for IoT edge units. Functions embrace audio occasion detection, voice management, gesture recognition, predictive upkeep, sign classification, and materials detection.
Infineon Targets 30% SiC Market Share
We’re additionally searching for publicity to new chip supplies like SiC and GaN. Infineon receives one other massive checkmark, as the corporate introduced simply final yr a significant funding of as much as about $5 billion at its manufacturing amenities in Kulim, Malaysia. That follows a roughly $2 billion dedication in 2022. Mixed with the conversion of present SiC manufacturing traces on the firm’s manufacturing unit in Villach, Austria, Infineon believes it will probably seize 30% of the SiC market by the top of the last decade. In 2023 alone, the corporate grew silicon carbide income by 65% to greater than $500 million.
Competing with Infineon for the title of the world’s largest SiC semiconductor manufacturing unit utilizing 200-millimeter manufacturing know-how is Wolfspeed. The latter not too long ago introduced plans to construct a facility in Infineon’s residence turf of Germany, even whereas struggling to ramp up manufacturing at its new fab manufacturing unit in Mohawk Valley, New Yawk. Regardless of the rivalry, the 2 corporations are additionally enterprise companions: Earlier this yr, they introduced plans to broaden and lengthen an present provide settlement by which Wolfspeed supplies base silicon carbide materials to Infineon.
Along with SiC, Infineon can be specializing in gallium nitride for energy semiconductors, notably for purposes with larger switching frequencies, similar to cell charging, energy provides for information facilities, photo voltaic inverters for personal households, and onboard chargers for electrical autos. Towards that finish, Infineon acquired a 3rd startup in 2023, GaN Programs, for $830 million so as to add the Canadian firm’s technical experience into its portfolio.
Infineon Inventory: One Large Pink Flag
Infineon inventory: What’s to not love, proper? The corporate gives publicity to each EVs and standard autos, diversifying threat as international locations make the shift to decarbonize their economies. Extra broadly, it’s a pick-and-shovel play on inexperienced applied sciences. Infineon additionally supplies publicity to each IoT and AI, notably within the space of edge computing. As well as, revenues are geographically dispersed, with a wholesome quantity coming from China. For instance, Infineon earns between $500 and $1,300 per automobile from its Chinese language prospects throughout greater than 10 completely different fashions.
Common readers of Nanalyze know that no firm we evaluate is ideal – and that features Infineon. We discovered one purple flag, the unique sin of Nanalyze’s easy guidelines of investing. Infineon is guiding to zero income progress in 2024. Worse: On the revised midpoint forecast, income will probably lower 2% this yr in comparison with final yr. In its 2023 year-end wrap-up, administration had guided to about $18 billion +/- $500 million however downgraded its estimate to roughly $17 billion +/- $500 million in Q1-2024. Gross and web margins are additionally anticipated to dip. Administration blames half the decline within the forecast income on the euro-to-dollar alternate price. The opposite half seems to be associated to the same old macroeconomic headwinds – mushy demand amid extra inventories.
One purpose we might drop a inventory is that if income stalled for a protracted time frame. On this case, we it’s laborious to contemplate going lengthy any disruptive progress inventory that’s seeing stalling income progress. Based mostly on EV sale developments and the present state of renewable power – SolarEdge, a key buyer within the Kulim manufacturing unit enlargement, is floundering badly – looks as if 2024 might be going to be a wash for Infineon.
Conclusion
We discovered rather a lot to love about Infineon inventory. Nevertheless, we would wish to dig even deeper if we determined that it represents the perfect wager on EV chip know-how. Primarily, that entails analyzing different EV chip shares on our brief record. Sporting a low easy valuation ratio (market cap/annualized income) of lower than 3, Infineon inventory ought to stay a discount bin purchase for the foreseeable future, so there isn’t a rush to seize it now. Well-known final phrases.
