Although the global push to break away from the internal combustion engine continues to gain traction, this process won’t take place overnight, notes Elliott Gue, growth expert and editor of Energy and Income Advisor.
The transportation segment appears ripe for disruption; the convergence that revolutionized the mobile phone by leveraging the declining cost of computing power and data storage and transmission has the auto industry in its sights as the next target.
This opportunity set reflects the eventual migration of in-dash information and entertainment consoles and advanced driver assistance systems from luxury vehicles to regular cars, as well as the electrification of transportation and the push for autonomous driving.
All these trends point to the amount of semiconductor content in the average passenger vehicle at a much faster rate than in the consumer electronics segment. As an added bonus, the longer product development cycles in the auto industry also result in stickier design wins and improved revenue visibility relative to the relatively rapid turnover in cell phones and other consumer electronics.
Even if adoption of electric vehicles occurs over a longer time frame, the electrification of automobile subsystems—for example, electric braking systems to support advanced-driver assistance systems—creates a near-term upside catalyst for power semiconductors.
These components account for roughly 50 percent of the semiconductor content in electric vehicles and hybrid electric vehicles. These tailwinds should support volume growth regardless of near-term fluctuations in overall auto sales.
Intel Corp. (INTC) is a Buy under $54. Weakness the PC market remains a headwind, but Intel also offers leveraged exposure to growing demand for servers and artificial intelligence to support autonomous driving and other functions.
Infineon Technologies (Frankfurt: IFX) is a Buy under EUR20. Industry leader in power semiconductors, with an estimated 26 percent share of automotive market. Currency-related headwinds mask strong underlying growth and could create buying opportunity on pullback.
Rohm Co. (Tokyo: 6963) is a Buy under JPY12,000. Rohm has transitioned itself from a specialist in low-power integrated circuits for consumer electronics to a company that generates about half of its revenue from medium- and high-voltage power semiconductors for the rapidly growing industrial machinery and automotive segments.
Power electronics has emerged as an important growth market, fueled by demand for data-center power supplies, high-efficiency inverters for wind- and solar power inverters, robots and factory automation as well as the ongoing electrification of automobile subsystems to support advanced driver-assistance systems — automated braking, for example.
Although Rohm didn’t enter the IGBT (a transistor known for its efficiency and fast switching) market until 2015, the company’s industry-leading capabilities in the design and production of next-generation silicon-carbide in the third quarter contributed to year-over-year sales growth of 19 percent in automotive segment and 21 percent in the industrials vertical.
All signs point to these tailwinds continuing over the intermediate term, as silicon carbide-based power semiconductors take market share from silicon-based IBGTs, which have approached their physical performance limitations. Outside of the auto segment, Rohm’s exposure to industrial chipsets used in factory automation and robotics provides another upside driver.
Texas Instruments (TXN) is a Buy under $112. The semiconductor giant represents the gold standard in analog semiconductors, chips that translate physical phenomena (sounds and temperature, for example) into digital information.
This segment of this chip market tends to offer better margins, while Texas Instruments’ scale, focus on embedded solutions and low-cost manufacturing capacity give it a leg up on the competition.
Texas Instruments serves a wide variety of end markets but generates about 50 percent of its sales from the rapidly growing industrial and automotive industries — a key upside driver for the stock and one of the reasons we argue that this information technology company should be valued as a high-quality industrial stock.
Management recently updated its guidance for returning 100 percent of free cash flow to shareholders, targeting a dividend payout ratio that’s 40 to 60 percent of this metric. The company also aims to convert about 25 to 35 percent of its revenue into free cash flow, up from 20 to 30 percent. Recent weakness in stock creates a compelling buying opportunity.
Elliott Gue is editor of Energy & Income Advisor.
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