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Hey everybody, welcome back
to Chip Stock Investor.
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We have been getting a lot of questions
about our power chip basket of stocks.
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And when I say our power chip basket,
what I'm talking about is what you see
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right here, power and sensor basket, On
Semi, Microchip, Monolithic Power Systems.
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And then our small bets basket
power and sensor chips, Aehr Test
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Systems, and Axcelis technologies.
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Today, we're going to
be focusing on, on semi.
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And before we launch into on semi,
you should probably just mention here
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that some of you, maybe you're new,
you're just showing up and you know,
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that we cover monolithic power, our
test systems and Axcelis, and you're
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a little bit miffed that these didn't
end up in our top picks for 2025.
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We are doing things a little
bit differently this year.
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We're not doing a brand new top stocks
list at the beginning of the year.
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We still like the list that we made
for 2024, and so we're leaving it.
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We also provided you with our
top holdings in the semiconductor
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market headed into 2025.
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We're going to let that suffice.
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Just let it be known that
there's nothing wrong with these
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businesses in our viewpoint.
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We still like them.
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We're monitoring the situation.
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And so to introduce on semi, let's
talk about that situation for the auto
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industrial and power chip market for 2025.
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If you want to take a look
at those videos that Nick
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it is talking about check the video
description we'll have on linked
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there, as well as here in the video.
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If you want some more nuanced
discussion surrounding these companies
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and much, much more, check out our
Semiconductor Insider Membership, you
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can gain access to our discord server
via a link in the video description,
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we have a Kofi page where
you can set that up.
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Check it out in the link below.
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Many of you maybe are getting familiar
with this chart where we map out
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the cycle that the semiconductor
end markets are in currently.
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We'll be focusing on auto and
industrial today, last peak in
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late 2023 and currently bottoming.
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We hope.
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We hope.
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Yeah.
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That's the expectation that's
been set, but this is the
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problem though, right Kasey?
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So last summer, summer of 2024, or if
you're in the southern hemisphere, I
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guess that would be winter of 2024.
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We've had that pointed out to us.
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Sorry about that.
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We don't want to leave out
the Southern hemisphere.
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This was the expectation six, seven
months ago that we were going to have
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a quick recovery or a quick return to
a revenue and sales recovery for power
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chips, including on semiconductor.
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That has not panned out.
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And now we're looking at what we're
calling now a U shaped recovery
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incoming, perhaps, summer, 2025.
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U shaped recovery,
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we borrowed that term from lattice
semiconductors, new CEO, but this
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is the expectation now for on
semi and pretty much the entire
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basket of our power chip holdings.
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And this is especially troublesome for
Aehr and Axcelis, because until there's
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more pronounced uptick recovery and
revenue for companies like on semi,
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microchip, Monolithic Power, and their
third party manufacturers, Lattice Semi,
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take your pick some of the equipment
providers like Aehr and Axcelis,
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are going to struggle for direction.
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So that's an important point
to think about before we
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begin talking about on semi.
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Even though the end markets that on semi
participates in have been struggling in
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the recent quarters, you can see that
gross margins have bottomed out at around
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45%, which is pretty fantastic because in
a previous bottom cycle on semi was around
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30 percent in their gross margin, and
the company is overall still profitable.
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Yeah, and of particular note here,
the company has reshuffled its
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portfolio of products to really double
down on automotive, and industrial.
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It's something like 80, 90 percent of
on semi sales are specifically geared
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towards auto Industrial at this point.
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So this is really where they've
repositioned themselves and are
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betting on their long term success.
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And in that basket, of course,
lots of power chips and power
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solutions as well as various sensors.
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They're one of the leaders in machine
vision, and those cameras can be used in
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anything from an advanced driver assist
system in a car, or it could be the
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robotic arm, on a manufacturing line.
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So a lot of different applications for
these different power chips from on semi,
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but the point is, under new leadership
over the last three years, especially, on
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semi has completely repositioned itself
and has really emerged as one of the
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strongest from a financial standpoint,
one of the strongest companies in
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the IDM space, the integrated device
manufacturers, those companies that both
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design and manufacture their own chips.
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On semi is really doubling
down on their goals.
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You can see on the very right side
of this chart, the 2027 targets that
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they have in place for themselves.
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You can see that their revenue, they
expect to grow to 10 to 12 percent CAGR
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or compound annual growth rates, and
then jumping down to the gross margin.
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We mentioned it's around 45 percent
currently, they expect that to
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jump up to 53 percent by 2027.
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And then on their free cashflow.
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You can see in Q3,
2024, it was around 14%.
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They expect that to double in a
range of 25 to 30 percent in 2027.
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Let's take a moment and talk about
capital expenditures for OnSemi
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because they've really been trying
to right size their business.
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Yeah, this is obviously a
never ending concern for a
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manufacturer of semiconductors.
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You have to be concerned with
what you're spending on equipment.
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And so one of the ways that they expect
to get to that free cashflow margin
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of 25 to 30 percent in the next couple
of years is progressively scaling back
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their investments, especially on silicon
carbide or SiC, next gen power chips.
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And you can already see this
at work in the recent quarters.
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We're now well under $200 million
in CapEx spending on property and
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equipment like manufacturing equipment
in the last couple of quarters.
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Down significantly from the over $400
million they were reporting in Q3 of 2023.
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And so this is the primary reason why
some of the semiconductor manufacturing
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equipment specialists, not the
generalists like Applied Materials
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that have the ability to pivot their
sales to whatever the hot part of the
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semiconductor manufacturing market is,
the specialists like Aehr Test systems.
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Obviously they've made their
name in particular on testing
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equipment for silicon carbide.
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And then as well as others
like Axcelis Technologies
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specialist in ion implantation.
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Another important ingredient when you're
working on power chips, in particular.
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Silicon carbide power chips.
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Some of these companies may continue
to struggle until we get confirmation
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that we're going to have a more
dramatic recovery in revenue
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for these power industrial and
automotive chips later on in 2025.
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So maybe just a little nuance
to this discussion here.
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We still have Aehr and Axcelis in our
small cap basket, but we're not currently
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allocating more money to them yet.
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Instead, we're thinking some of the
companies further down the supply chain,
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the companies that actually develop and
make and sell the chips to the end markets
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on semi, Microchip, Monolithic Power.
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They should see the recovery
first before the market pays more
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attention to Aehr and Axcelis.
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At least that's our
current view at this time.
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Earlier this year we posited this
timeline of events you can see in 2030,
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we said possible excess manufacturing
capacity, fallout from global over
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investment friend-shoring and on shoring
but what we see actually happening is
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here in early 2025 is that's actually
moved up very rapidly to right now.
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We're seeing some of the effects
of that on shoring and friend
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shoring overcapacity right now.
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Yeah.
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And a lot of this is probably because
China has made it a priority to onshore a
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lot of basic chip component manufacturing.
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Like for example, power and sensors.
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These are so called mature
manufacturing processes.
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The equipment is not off limit for
them to purchase and start up a fab.
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And so that has leveled some hurt
on some of the power chip suppliers
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outside of China, as sales have
been a little bit hard to come by
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for the last year and a half or so.
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Now we called the bottom too early last
year obviously in the auto industrial
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and power chip market, but even at that
time we did point out that the company's
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entering this cyclical downturn with
financial strength are the ones that
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are most likely to come out on top.
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Don't try to bottom feed on this hoping
that your YOLO investment into some
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company that's highly unprofitable
in power chip manufacturing is
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going to make you a millionaire,
probably not going to happen.
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And like Kasey just pointed out on
our timeline, that's exactly what is
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panning out, because OnSemi, with its
financial strength, has been mopping
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the floor with some of the fallout from
this overcapacity in manufacturing.
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This news brief from late December reports
that OnSemi purchased a fab building in
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DeWitt, New York for just $20 million.
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And it's interesting because the
news brief says that it was actually
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a hundred million dollars spent on
constructing this fab in the first place
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for failed startups, Sora and NextGen.
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Unfortunately, just not
every startup can make it.
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Yeah, chip manufacturing is very
expensive, even in that so called mature
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manufacturing process, part of the market.
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This is not cheap and it's not
easy to get up and running.
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Case in point, OnSemi made
another acquisition recently
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that we've been talking about
over on Semiconductor Insider.
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This was a little bit
earlier in December, right?
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Yes, OnSemi acquired the Silicon
Carbide JFET or Junction Field
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Effect Transistor business from
Qorvo which also included the United
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Silicon Carbide business from Qorvo.
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They purchased this for just
about $115 million in cash.
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Got two businesses.
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Essentially, or to got two departments,
I could say for pretty cheap price.
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Yeah.
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And this could turn into a sizable
business for on semi over the
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course of the next few years.
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Of course these Silicon carbide
by JFETs it's hoped will play
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an increasing share in the data
center server and AI server market,
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as a lot of those servers are
consuming, as you probably know,
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massive amounts of electricity.
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As well as, if the EV market ever makes
a recovery in North America and Europe,
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we're hopeful that it will, there's
going to be a lot of application for
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silicon carbide semiconductor devices
in that part of the market as well.
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But just to get back to the point
here, companies that are operating
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from financial strengths, in the
midst of a downturn, here's what
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Qorvo paid for United Silicon
Carbide back in just the end of
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2021, a little over three years ago.
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Qorvo didn't disclose exactly what they
paid for this business, but you can get
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a good idea if you do some digging in
the quarterly filings, and it's not hard
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to see that they paid, perhaps double
or more what on semi just paid Qorvo for
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this United Silicon Carbide business.
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In, Qorvo's fiscal year that ended
in April, 2022, they spent almost
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$400 million in cash acquisitions.
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Not all of that was United SiC,
but, you get the point here.
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We've been critical of Qorvo in the past.
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They are in need now in the midst
of a downturn, to right size
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their manufacturing capacity, to
match the actual customer demand.
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OnSemi already did this hard work
beforehand, and now they're able to go
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out with their cash on hand and scoop
up some real deals from companies that.
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are not operating from
a position of strength.
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And that position of strength,
you can see very clearly on
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the balance sheet for on semi.
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You can keep in mind that this
is from the years 20 through 23.
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And the last 12 months there on the right.
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On semi has $2.
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7 billion in cash and
debt, just over 3 billion.
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Not bad.
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Yeah, not bad at all.
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Especially considering this is
what the balance sheet looks like
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after a pretty nasty downturn
over the course of the last year.
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And this is thanks to the fact that
the company has continued to be
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profitable throughout this down cycle.
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That really means something in a
manufacturing industry like this one.
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Okay, Kasey, this is the point where
a lot of people are going to fast
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forward into the video and they
want to know about the valuation,
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and ultimately if we're buying on semi
stock, so tell me about the valuation.
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All right.
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I will.
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On a forward basis, you can see price
to free cash flow right around 13
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to 14 X and price to earnings on a
forward basis between 16 and 17 X.
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This looks really cheap.
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However, there's a few things that need
to happen for this to be really cheap.
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And it really all comes down to this
slide right here, this U shaped recovery.
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OnSemi does look very cheap,
but it's only cheap if this is
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actually what's happening in 2025.
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That recovery.
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Yeah, we need confirmation that
revenue growth is indeed back in play.
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Now, OnSemi has the benefit
of being profitable.
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So that should put a bit of a
floor under the stock price.
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In our belief, especially with the
valuation already having come down
00:14:48
significantly in the last year,
but we'll see how this pans out.
00:14:51
There are a lot of companies competing
in auto and industrial chips and in power
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chips, especially coming out of China on
semi again has reshuffled its portfolio
00:15:01
to focus on more advanced capabilities
in automotive and industrial and power.
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And so that could help them stave
off some of this new competition,
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but just bear this in mind, folks,
we'll be monitoring this very closely.
00:15:15
We own on semi, we think it's cheap.
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We're happy to have it in our portfolio,
but we're still cautiously optimistic.
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Once again, these stocks are not part of
our top 10 positions in our portfolio,
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but that doesn't mean we don't like
them on semi, Microchip, Monolithic
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Power are all part of our auto and
industrial and power and sensor basket.
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And then as far as our small caps go
Aehr Test Systems and Axcelis in this
00:15:42
portion of the semiconductor industry.
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We're very happy to keep them.
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Yeah, and we do add to these periodically.
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We disclose ahead of time when we will
be doing so over on Semiconductor Insider
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on our Discord channel, check that out.
00:15:56
That's also where you'll find all of the
research we do on all of these businesses.
00:16:00
A lot of moving targets here.
00:16:02
just to reiterate what Kasey said, we do
like these businesses and we're hopeful
00:16:07
that 2025 will bring better times for this
part of the semiconductor market, join
00:16:12
us over on Semiconductor Insider, do it.
00:16:14
We've been told it's
a pretty decent value.
00:16:17
Thanks everybody for watching this video,
make sure you sub to the channel, like
00:16:21
the video and share with your friends.
00:16:22
See you all soon at Chip Stock Investor.
00:16:27
You got this.
00:16:29
We're going to have a good day.
00:16:31
We're going to have a good Friday.
00:16:35
We're going to try.
00:16:37
I'm having a good Friday.
00:16:38
Kasey is trying to have a good Friday.
00:16:41
Okay.
