TomekD76/iStock via Getty Images
TomekD76/iStock via Getty Images
ON Semiconductor, or onsemi (NASDAQ:ON ), heavily emphasizes that the company's strategic advantage is its Silicon Carbide-based products. According to Hassane El-Khoury, President and CEO of onsemi:
Silicon Carbide is at the forefront of our new strategy and our recent acquisition of GT Advanced Technologies Inc. will allow us to secure supply for our customers, solidifying our leadership in this rapidly growing market.
This statement defined ON's prospects and the company's investment value proposition. Therefore, this article aims to discuss ON's growth sustainability through understanding its key asset, Silicon Carbide (SiC).
SiC is a material used to produce semiconductors that are traditionally dominated by silicon, including the ones used in inverters. Inverters are used to convert power from electric vehicle (EV) batteries' direct current (DC) into alternating current (AC) to power the EV's AC motors. Traditional silicon-based inverters suffer from about 20% power loss which results in less range in EVs and longer charging time.
This power loss problem is solved by switching over from silicon to SiC. SiC-based inverters are significantly smaller, lighter, and a more efficient (less power loss) than silicon-based inverters because of the following benefits:
Aside from better range and charging time, SiC-based inverters reduce the manufacturing cost of EVs by requiring less cool systems and other countermeasures.
We explained silicon carbide through EV because 65% of ON's revenue is derived from automotive and industrial end markets.
Furthermore, we find our consultant's input to be true. The SiC-based driving system is not experimental but is time-tested and commercially adopted. Tesla's (TSLA) adoption of SiC in 2018 attests to SiC's viability. In 2018, Tesla became the first company to use SiC-based inverters. This allowed Tesla to charge from 0% to 80% battery in 30 minutes
Fast forward to 2021, NIO (NIO) acknowledged the core advantage of SiC and announced the switch to SiC-based driving systems. NIO stated that NIO already tested and verified mass production of its first SiC electric drive system. This SiC electric drive system is NIO's 2nd-gen electric driving system. NIO stated that this SiC electric drive system is more efficient, compact, and lightweight. Nio expects this SiC driving system to provide a longer range for its vehicles.
Connecting the dots between ON's SiC-based products and NIO's pivot to SiC driving systems, the ON-NIO partnership is a long time coming. According to Business Wire:
NIO Inc. chose the latest VE-Trac™ Direct SiC power modules from onsemi for its next-generation electric vehicles (EVs). The silicon carbide (SiC)-based power modules enable longer range, higher efficiency and faster acceleration for EVs. The collaboration of the two companies is expediting the commercialization of SiC technologies to bring EVs equipped with advanced semiconductor material to the market.
With NIO regarded as the Tesla of China, NIO's choice of using ON's SiC power modules confirms ON's claim of being a market leader.
We have positioned onsemi as a leader in intelligent power and sensing and pivoted our investments to align with the high-growth megatrends in automotive and industrial. Hassane El-Khoury
According to Report Ocean, silicon carbide is used in other products as well, including ballistic body amour, satellite, LED lighting, telecommunications, and low power consumption devices.
Coincidently, ON-acquired GT Advanced Technologies Inc supplies SiC and sapphire crystal materials for EV, telecom, industrial, defense/aerospace, and optical applications.
This acquisition is indeed strategic to secure SiC supplies as other players are looking to get their hands on SiC products. For instance, SK Siltron acquired DuPont's SiC Wafer Division in 2021 to secure supplies to meet the high demand for building 5G network infrastructure. Tesla sources its SiC from the regarded leader in the SiC market, STMicroelectronics.
The SiC market is expected to reach $6bn by 2027 up from over $1bn trillion in 2021. Therefore, ON is indeed well-positioned to align with the megatrends in automotive and industrial.
We've previously assessed China's automotive industry to determine NIO's fair value. We made several observations regarding the EV market below:
We estimated China's auto sales to reach 26 mil units by 2030. With EVs capturing 30% of the total market, EV sales would reach 8 mil units. This figure is very like underestimated. China EV sales are estimated to reach 2.5mil in 2021, with 1.6mil EVs sold by Aug in 2021. This means that China's EV market has already penetrated 10% of the auto industry.
US auto sales historically oscillate between 10 mil to 20 mil. Conservatively, we estimate US auto sales to be 15 mil by 2030 (Fig 1). 50% EV market share implies 7.5 mil units of EV to be sold. McKinsey estimated that only EV market share in 2021 stands at only 3.6% or 0.16 mil units.
Europe Auto Sales isn't growing either. According to the European Vehicle Market Statistics 2020/21, we can estimate European auto sales to be around 16 mil units. Conservatively, we can assume 50% of auto sales to be EV by 2030 before going full EV before 2035. This implies that 8 mil units of EVs are to be sold by 2030. European EV sales in 2021 stand at 1.2 mil.
2021 EV sales stand at approximately 4mil units while 2030 EV sales are estimated to be 24.5mil. This implies a 6x growth. Similarly, the SiC market is expected to grow 6x as well. It seems 6 is a pretty good number.
Assuming ON was to maintain market share and margins, this presents ON with a 22% CAGR through 2030, which aligns with historical trends (Fig 3). However, what was absent in the historical growth is the EV megatrend. We believe this 2020-2030 decade is the inflection point for EV adoption as this transition is supported by top governing entities. Therefore, 22% CAGR is very likely to be the baseline CAGR.
Fig 1. US Auto Sales (Fred) Fig 2. European Auto Sales (ICCT) Fig 3. ON Revenue Growth (YCharts)
Fig 1. US Auto Sales (Fred)
Fig 2. European Auto Sales (ICCT)
Fig 3. ON Revenue Growth (YCharts)
From the discussion above, it is observable that ON is well-positioned to capitalize on megatrends of the 2020-2030 decade. Assuming maintaining market share and margins, the company's top line and bottom line are expected to grow at a baseline 22% CAGR through 2030. ON's valuation is also likely to follow the same rate given that its valuation approximates the sector average. What's interesting though, is that the leading SiC company, ST Microelectronics (STM), has the lowest valuation. This deserves further investigation.
ON and its peers in the power solutions sector, analog solutions sector, and image sensor sector failed to return a positive return in 2022 despite record sales and earnings. This is because the sector is expected to undergo a reset caused by recessionary risks. Auto sales are correlated to GDP growth (economy health). Scientific studies show that consumers are less likely to spend money on expensive depreciating assets such as vehicles when they're not confident towards the future. Hence, auto sales are widely accepted as a proxy to consumer confidence and sentiment. Therefore, it is important to understand the overall trend of the global economy. Some academics suggest that GDP affects auto sales; some argue that auto sales affect the economy. Both are true, and we think that it is a chicken and egg problem.
Several players in different parts of the semiconductor supply chain have echoed some form of a less ideal economic outlook. Tesla announced intentions to cut its labor force by 10%. Intel (INTC) announced hiring freeze in anticipation to softening demand. Meta Platforms (META), formerly Facebook, also announced hiring freeze and insiders fear layoffs are coming.
Since auto sales and industrial end markets are subjected to economic cycles, ON's short-term outlook may look uncertain.
In this article, we made several key observations for ON:
Therefore, it is evident that ON's growth is sustainable after understanding the technology (SiC) ON emphasized heavily. ON is valued at approximately the average of players in the power solution sector, analog solutions sector, and image sensor sector. Hence, valuation is likely to grow at the same baseline 22% CAGR.
Short-term downside risk persists due to economic cycles where players in different parts of the semiconductor supply chain have signaled anticipation of an economic slowdown of some form. Since two-thirds of ON's revenue is derived from the economic cycle-prone industries (automotive and industrial end markets), ON is subjected to face temporal headwinds.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of ON either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.