To The Moon

The most impressive thing about Nvidia's earnings report today is that Jensen Huang said the automotive business will be the next billion dollar business for Nvidia in the future. A quick glance at the Philadelphia Semiconductor Index reveals that $ON Semiconductor (ON)$ and $Wolfspeed Inc.(WOLF)$, both of which are upstream automotive chips, are at record highs!

Over time, ON Semiconductor and Wolfspeed have continued to rally from their lows this year, up 63% and 98% respectively as of yesterday's close, making them the best performing chip stocks in the Philadelphia Semiconductor Index this year.

Why are Wolfspeed and ON Semiconductor so strong? What are the key factors behind the rally?

Silicon carbide leader outperforms expectations

Wolfspeed, a 35-year-old company that was known as Cree until last October, has changed its name and ticker symbol because most of its products are now sold under the Wolfspeed brand. It sells silicon carbide materials, power switching devices and RF chips to a wide range of industries.

Wolfspeed sets itself apart from its industry peers by producing wide band gap (WBG) semiconductors made from silicon carbide and gallium nitride materials. WBG semiconductors can operate at higher voltages, temperatures and frequencies than chips produced using more traditional materials such as silicon and gallium arsenide. This energy efficiency makes WBG chips ideal for short length LEDs, lasers, 5G base stations and military radars. Electric vehicle manufacturers also use silicon carbide for their batteries and powertrains.

Wolfspeed reported fiscal fourth quarter 2022 revenue up 56.7% year-over-year to $228.5 million, beating estimates by $20.9 million; and an adjusted loss of 2 cents per share, compared to Wall Street's widespread expectation of a loss of 10 cents per share.

Chief Executive Officer Gregg Lowe said the company opened the world's first fully automated 8-inch silicon carbide wafer fab in the Mohawk Valley, making significant progress in revenue growth while improving profitability. Design-in revenue reached a record $2.6 billion in the fourth fiscal quarter, adding to the $1.6 billion in each of the previous two quarters, further demonstrating the potential for continued revenue upside in 2026, which is now expected to be 30 to 40 percent higher than the $2.6 billion forecast at the end of last year.

Wolfspeed is the global leader in silicon carbide, having launched its first mass-produced silicon carbide substrate back in 1991, and the company now has a market share of over 60% of silicon carbide substrates. The company's performance and quality is so dominant that even competitors in the same industry, such as STMicroelectronics, Infineon and ON Semiconductor, have had to spend hundreds of millions of dollars to purchase from it.

Wolfspeed's expansion moves, pricing strategy, earnings and valuation levels are all important references for silicon carbide research. The company's current results reflect the pace of automotive electrification and higher than expected growth in silicon carbide penetration in both the automotive and non-automotive sectors.

Following the results, the company's shares once soared 32%, driving ON Semiconductor, which also has a silicon carbide layout, up 7%.

ON Semiconductor silicon carbide capacity expansion

ON Semiconductor, formerly Motorola's semiconductor components division, was spun off from Motorola in 1999 and has taken a leading position in the industry through a number of acquisitions. After completing the acquisition, ON Semiconductor offers devices and solutions across the full voltage range, making it the second largest supplier of power semiconductors in the world. With production lines in Korea, Malaysia, Suzhou and Shenzhen, China, ON Semiconductor has a well-established supply chain in the Asia Pacific region.

As one of the world's top 10 automotive semiconductor suppliers, ON Semiconductor is ranked No. 1 in key automotive system technologies such as image sensors, ultrasonic sensor interfaces, LED headlights, MOSFET power modules and ignition IGBTs, and No. 2 in automotive power MOSFETs and discrete IGBTs.

ON Semiconductor has the highest share of the automotive business, with close to 40%, and in second place is the industrial business. The silicon carbide (SiC) business in the automotive segment is the main driver of the company's growth.

In news, ON Semiconductor recently celebrated the completion of a silicon carbide plant in New Hampshire. This facility will enable ON Semiconductor to quintuple its SiC wafer capacity year-over-year by the end of 2022 and almost quadruple its workforce in Hudson.

This expansion gives ON Semiconductor full control of its SiC manufacturing supply chain, from the sourcing of SiC powder and graphite feedstock, to the delivery of packaged SiC devices. This allows ON Semiconductor to provide its customers with the necessary supply assurance to meet the rapidly growing demand for SiC-based solutions. The company has also revealed that customers have committed to purchasing a combined US$4 billion of silicon carbide over the next three years.

Silicon carbide (SiC), also known as a broadband semiconductor, has a large forbidden band width, high breakdown field strength, high thermal conductivity, high radiation resistance and high frequency compared to elemental semiconductors such as silicon. SiC is an ideal semiconductor material for high-temperature, high-frequency, radiation-resistant, high-power applications and is critical for improving the energy efficiency of electric vehicles (EVs), EV charging and energy infrastructure.

As SiC power devices can significantly reduce the energy consumption of electronic devices, SiC devices are also being touted as the green energy device that will drive the new energy revolution. The total potential market volume for SiC is expected to grow from US$2 billion in 2021 to US$6.5 billion in 2026, a compound annual growth rate of 33%.

At its earnings meeting in early August, the company said it had significantly increased its original expectation of a doubling of SiC by 2022 due to the company's global customer and capacity footprint, and that it expected SiC revenues to double by 2022 and exceed US$1 billion by 2023.

Following the silicon carbide plant expansion celebration, analysts at Mizuho Securities reiterated their Buy rating on ON Semiconductor and raised their price target to $79 from $72.

Rise of new energy vehicles is key

Distinguished by semiconductor materials, the industry generally divides semiconductors into three generations: the first generation of semiconductors is the current widely used high-purity silicon, the second generation of compound semiconductor materials including gallium arsenide and indium phosphide, and the third generation of compound semiconductor materials represented by silicon carbide and gallium nitride.

Silicon carbide is an important basic material for the development of the third-generation semiconductor industry. With its excellent performance of high voltage resistance, high temperature resistance and low loss, silicon carbide power devices can effectively meet the requirements of high efficiency, miniaturization and light weight of power electronic systems. Therefore, the material has obvious advantages in new energy vehicles, photovoltaic power generation, rail transportation, smart grid and other fields.

The proportion of semiconductors used in traditional fuel vehicles is generally not high, but with the rapid popularity of electric vehicles and plug-in hybrid vehicles, the proportion of semiconductors in the direction of automotive electronics has increased significantly.

Measured in terms of cost, the value of a semiconductor device used in a car was previously no more than $50, and now it is perhaps a thousand dollars or more.With the development of new energy vehicles, the number of semiconductor devices used in complete vehicles has increased geometrically, causing the total demand for semiconductors in the electric vehicle market to take an exponential leap.

According to Wolfspeed's calculations, when the power components in the inverter of a pure electric vehicle are replaced with silicon carbide devices, the power consumption of the whole vehicle can be reduced by about 5% to 10% due to the increased efficiency of electrical energy conversion, the increased efficiency of electrical energy utilization and the reduction of ineffective heat consumption.

Tesla has been extremely cautious in cost control, such as the use of modular platforms, die-cast body molding, battery pack optimization design, abandoning the LIDAR and other production means, are in as far as possible to compress production costs.

But such a "stingy" Tesla is willing to spend a lot of money on silicon carbide chips to improve the range of the car, which shows that the performance of silicon carbide is irreplaceable.

In its latest report, Yole, a leading semiconductor analyst, also specifically mentions that the "Han" series of electric cars from BYD (01211)$ and the Ioniq-5 electric car from Hyundai are equipped with high performance silicon carbide modules for fast charging, which is one of the reasons for the continued high sales of both models.

It could be said that the rapid growth of silicon carbide has been driven by the hot sales of electric vehicles.

According to Yole, a leading semiconductor analyst, the global market for silicon carbide power devices will be $540 million in 2019; grow to $710 million in 2020, a 31% growth rate; and grow by 41% to exceed $1 billion in 2021.

And $1 billion seems to be just the beginning. It has been calculated that if all the power devices on board Tesla's cars were replaced with silicon carbide devices, the use of that single car would be half a 6-inch wafer.

In 2021, the global production of silicon carbide wafers only 400,000-600,000, combined with the industry's average yield of about 50% estimates, the effective capacity of only 200,000-300,000 pieces. The current capacity of silicon carbide wafers cannot even meet the needs of one car company. This is why both Wolfspeed and ON Semiconductor are accelerating their production expansion.

In short, with the rapid development of the new energy vehicle market represented by Tesla and Wei Xiaoli, it will further drive a large number of products represented by silicon carbide power devices to take off quickly. Personally, I am more optimistic about Wolfspeed, and I feel that there will be a pullback later, so I can choose the right time to start.