The production of lithium is scaling up rapidly, alongside the establishment of lithium refineries like the one built by Tesla (TSLA), which CEO Elon Musk has referred to as a “license to print money.” These refineries offer the opportunity to process lower-grade lithium, which is more abundant, into batteries suitable for EVs. At the same time, hedge fund managers and analysts see promise in another aspect of powering EVs – silicon carbide chips.
The electric vehicle (EV) revolution is gaining immense traction, as recent research from Morgan Stanley (MS) indicates that EVs already account for 8% of global auto sales. With projections showing a potential rise to 35-40% by 2030, surpassing previous estimates of 25-30% made just three years ago, the EV market is poised for substantial growth.
As the EV market continues to flourish, investors are eagerly seeking the equivalent of the oil boom in this sector. While lithium and cobalt have received significant attention, with investors pouring funds into companies like Albemarle (ALB) and the Global X Lithium & Battery Tech ETF (LIT), it is important to note that these commodities are not much different than other resources such as potash or orange juice.
What Are Silicon Carbide Chips?
Shahar Cohen is the founder of Lucid Capital, a hedge fund specializing in mid-cap stocks that outperformed the Nasdaq by 17% in the past year. Cohen suggests that Silicon Carbide (SiC) chips are the new secret sauce in the EV industry. SiC wafers are a fusion of silicon and carbon, created through a baking process in furnaces with temperatures reaching 2000 degrees Celsius (comparable to the outer surface of the Sun).
SiC transistors possess superior power-switching capabilities and lower leakage, while SiC-based inverters enable EVs to charge in as few as 7 minutes, extend their range by 5-10%, and reduce battery size by 10%. ON Semiconductor (ON) predicts that the SiC market will experience a 33% compound annual growth rate (CAGR) from 2022 to 2030, surpassing the growth rates of CPUs in the 1990s and mobile processors in the 2000s (20% and 18% CAGR, respectively).
However, the production of SiC wafers and chip fabrication is an intricate and complex process that demands expertise and know-how. As the CEO of Wolfspeed (WOLF) highlighted in Q4 2022, “It’s definitely not for the faint of heart. It comes with a lot of challenges.”
As a result, the SiC wafers require many steps in the semiconductors fabs. One of the most a crucial steps plays a role in the production of Silicon Carbide (SiC) wafers called Epitaxy. Epitaxy involves the precise deposition of thin layers of materials onto a substrate, creating high-quality crystalline structures with desired properties.
Who Makes SiC Chips?
According to Cohen, only three companies globally supply epitaxy machines for SiC wafers. One company to watch in this arena is Aixtron (AIXXF), a leading provider of deposition equipment, which has emerged as a key player in epitaxy technology development.
Aixtron’s power electronics business, which encompasses SiC and GaN, has experienced significant growth, accounting for 50% of revenues in 2022 compared to 5% in 2018. Shahar Cohen estimates that Aixtron’s revenues in 2023 will reach 620 million Euros, a substantial increase from the 260 million Euros in 2019, which will be largely driven by its SiC Epitaxy machines. With the company implementing price increases and benefiting from economies of scale in production, Aixtron is projected to expand its EBIT margin from 23% in 2021 to 27% in 2024. At 3B Euro valuation currently, the stock trades at a reasonable forward P/E of 18.
Analysts Weigh In
On April 27, analysts at Deutsche Bank gave Aixtron a Buy rating for the short-term, saying, “We regard the recent sell-off in Aixtron shares as overdone.” They are pleased to see a high order intake and backlog, and expect to see continued strong orders.
Four days ago, Morgan Stanley initiated coverage of AIXXF, but rated it a Hold. Analyst Lee Simpson said he recognizes the growing opportunities for this SiC company, but believes those opportunities have already been priced in, giving little room for upward movement of the stock.
SiC Chips – Huge Potential Opportunity
In conclusion, while lithium remains a critical resource in EV production it is still a commodity with little added value. Silicon Carbide (SiC) chips are emerging as a game-changer, offering enhanced performance and enabling significant advancements in EV technology.
However, the challenges associated with SiC wafer production and chip fabrication highlight the need for sophisticated “picks and shovels.” Aixtron’s represents a potential opportunity to address the industry’s key bottleneck, positioning itself as a pivotal player in the race towards electrification.