As we highlighted in last week’s article, semiconductors are a critical component in many of the leading-edge technologies that are transforming industries. This includes well-known innovations such as electric and autonomous vehicles, 5G and artificial intelligence (AI), and those that reach the public media less often, such as industrial automation and robotics. We also discussed the nuance in the semiconductor industry that is often poorly understood by outsiders. As a further illustration, let’s dig into three unique semiconductor producers that we believe have a bright future ahead.
Electric Vehicle Boomtime
Founded in 1987, Wolfspeed (NYSE:WOLF) produces what are known as wide bandgap semiconductors. It uses mainly silicon carbide (SiC) and gallium nitride (GaN) materials and produces semiconductors for various applications such as 5G, renewable energy and storage, aerospace and defense, and perhaps most importantly, electric vehicles and fast chargers. While it might not be a household name (nor is the company’s location in Durham, North Carolina), Wolfspeed is a leading vertically integrated SiC semiconductor wafer supplier that is primed to benefit from the shift to battery electric vehicles (BEVs).
Management clearly articulated the market opportunity at its 2022 Investor Day, where it described the accelerating investments by automotive original equipment manufacturers (OEMs) in next-generation vehicles and the corresponding benefit to semiconductor companies (CEO Gregg Lowe also has some interesting slides on his extracurricular activities). Overall, the transition from internal combustion engines (ICE) to Battery electric vehicle (BEV) powertrain nearly doubles the amount of semiconductor “content” per vehicle from approximately $500 to ~$1,000 per vehicle. The increasing adoption of BEVs is expected to lead to a 39% compounded annual growth rate (CAGR) in the value of SiC content in EVs from 2022 through 2027 (noting ~90% of SiC content in an EV is in the inverter). Success in EVs is also driving SiC adoption across other mobility segments and broader industrial applications, such as energy distribution, robotics and motor control. Arrow Electronics partnership has provided access to a global sales force to enter new markets and expand customer base.
Importantly, the development of high-voltage power devices is subject to different trends than the broader silicon semiconductor industry. This is a key factor that we described in last week’s article: investors should not paint all semiconductors with the same broad brush, but look at the drivers and microeconomics of each company on an individual basis.
Electrification of Everything
Based out of Geneva, Switzerland, STMicroelectronics (NYSE:STM) is another direct beneficiary of the transition to BEVs, with leading positions in both car electrification and car digitalisation. However, it has a more diverse analog business with leading positions in a number of other applications, including sensors, embedded processing, power/energy management, and select smartphone solutions.
ST Micro also provided a comprehensive overview of its business at a 2022 Capital Markets Day (this is the non-U.S. version of an “Investor Day”. FYI: while STM is listed on the NYSE it reports as a ‘foreign issuer’ and uses IFRS accounting instead of GAAP, which is similar to companies on the ASX). In particular, the company highlighted its expansion into high-growth automotive, industrial and personal electronics and CECP (communications equipment, computers and peripherals) that are expected to expand its total addressable market from US$12.8 billion in 2021 to more than US$20 billion between 2025 and 2027. This equates to a CAGR of between ~7.7% and ~11.8%.
In addition to the more obvious EV transition, the key trends benefiting STM are the buildout of energy infrastructure (and the associated energy management and power efficiency) and the proliferation of connected, autonomous objects in the Internet of Things. This includes the likes of robot lawnmowers, specialised industrial equipment (such as medical devices), and factory automation and industrial infrastructure (i.e., robots).
Unique Royalty Stream
Arteris (NASDAQ:AIP) is a much smaller company that only listed on the stock exchange relatively recently in October 2021. Despite its small size, Arteris is a leading semiconductor IP company with a focus on networking chip design and has diversified end markets with low concentration to specific regions, customers, and product types. In fact, it has broad exposure to a range of industries, including automotive (30%), communications (19%), enterprise (30%), consumer (9%), industrial (9%), and other product types (3%).
One of the main things that make Arteris stand out are its high exposure to artificial intelligence and machine learning, which the company says accounts for approximately 42% of revenue. This should be a huge benefit given the rapid advancement of this industry over the last 12 months, and includes things like Edge AI devices, Vision Devices, Generative AI, AI Accelerators, and advanced driver assistance solutions (ADAS). In fact, Arteris has approximately 70%-80% market share of the automotive ADAS system-on-chip (SoC) market.
The other attractive aspect is the company’s financial profile. As well as being debt-free, Arteris has a unique royalty-style income statement that has exceptional gross margins of 90%-95%. This highly profitable business model should deliver significant operating leverage (that is profit growth) as revenue increases. The early signs are promising also, with an ~17% CAGR in annual contracted volume, or ACV, over the past 3 years. These exceptional financial characteristics, exposure to industry tailwinds and the company’s size could also make Arteris a prime acquisition candidate for one of the larger semiconductor players.
Reap the Fruit of Your Labour
The number and variation in publicly listed semiconductor companies provide an incredible opportunity for investors to benefit from the key trends that influence all aspects of consumer life. While it might at first seem daunting with so much technical language and jargon, this is a common challenge when beginning to invest in many new industries.
Fortunately, the majority of companies provide very useful company presentations alongside their historical financial information, including investor or capital market days that are freely available on their investor relations websites.
Importantly, the fruits can be well worth the labour of the research, as top semiconductor investments can produce stellar returns for investors over long periods of time. Additionally, semiconductors are only likely to increase in their importance, as we saw during the pandemic and given the ever-greater electrification in our modern lives. The trends towards the Internet of Things and autonomous/electric vehicles are clearly visible in our own lives, and those towards industrial automation and robotics are just as inevitable, even if a little less visible.
Disclaimer: Wolfspeed (NYSE:WOLF), STMicroelectronics (NYSE:STM), andArteris (NASDAQ:AIP) are currently held in TAMIM Portfolios.
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.