Another Way to Play the Silicon-Carbide Breakout

Michael Robinson

Tuesday, January 10, 2023

Back on December 20 , I noted that silicon-carbide chips are set to have a huge impact on electric vehicles ("EVs").

This compound, a combination of silicon and carbon, has several advantages over existing silicon-only semiconductors. Notably, it's very stable and doesn't crack or melt, meaning it can withstand much higher voltages.

That's how chips made from this material can add 10% to an EV's range and make them charge faster.

I also suggested investing in Cadence Design Systems (CDNS), the market leader in helping companies develop chips, circuit boards, and related hardware – including making the switch to silicon carbide.

Not to worry. I'm not backing off of my investment thesis. On the contrary...

Today, I want to reveal another great way to play the silicon-carbide breakout.

This chip leader is harnessing the power of silicon carbide to improve its already impressive growth. In fact, it's on pace to double its earnings in just the next 18 months. Let me show you...

EVs: No Longer a Niche Product

It's official: EVs are no longer a niche product. In fact, the entire auto sector is going electric as part of the global drive to get to a "net zero" economy.

According to the International Energy Agency ("IEA"), EV sales accounted for 9% of all light-vehicle sales globally in 2021. That was double the previous year's number.

The IEA estimates the final percentage for 2022 to be 13% – another near-double, despite supply-chain issues forcing willing buyers to wait months to get behind the wheel.

Revenues in the global EV market, meanwhile, are growing even faster. This year, they'll reach almost $390 billion. And research firm Statista estimates revenues will reach $847 billion in 2027.

In some ways, EVs are like computers on wheels. They can feature as many as 3,000 chips that control the battery, power distribution, safety features, and much more.

That creates an enormous opportunity for companies supplying these chips, including STMicroelectronics N.V. (STM)...

Introducing STM

STMicro is a pioneer in silicon-carbide electronics and a leading provider of EV chips.

The company's cutting-edge approach to silicon carbide, including its launch of the first European factory to produce big wafers of the material, has enabled it to get ahead of competitors.

Last year, STMicro launched a third-generation version of silicon-carbide chips for EVs. And this new chip was the first one capable of running cars at voltages as high as 1,200V.

That voltage is too high for conventional silicon chips, which would suffer from heat damage under that strain. But silicon carbide, which doesn't melt under any known temperature (and is very resistant to cracks and damage) can handle these voltage levels without any problems.

This is great news for STMicro's clients, as the higher the voltage EVs run on, the less power is lost in transit from the battery to the wheels. That's crucial when trying to get as much range and power as possible out of limited EV battery capacity.

This Company Is Making Savvy Moves

It's no wonder STMicro can boast notable clients like Tesla (TSLA) and car-automation company Mobileye Global (MBLY). And it's all been possible thanks to considerable foresight from this company.

In 2018, STMicro saw how the growth in EVs would soon lead to increased demand for silicon-carbide chips. So it started securing supplies of both the raw materials required to make silicon-carbide wafers as well as the factories where the chips themselves are made.

In February 2019, STMicro purchased 45% of Swedish silicon-carbide wafer manufacturer Norstel AB and bought the rest of the company the following December. In November of that same year, it signed an $800 million agreement with another silicon-carbide wafer maker.

All in all, the company aims to capture 30% of the silicon-carbide market – an impressive goal.

To get there, STMicro is on track to receive 40% of its raw materials without having to buy them from external sources. The company uses that raw material – the silicon-carbide wafers – to make chips in factories in Italy and Singapore.

Relying on its own production, and spreading that production out across the world, is a savvy move. As we've seen with the pandemic-induced supply-chain issues, relying too much on other companies or just one region for manufacturing (China, for example) can fail catastrophically.

An Earnings Powerhouse

STMicro isn't done, though. As the EV market continues its breakneck growth, silicon-carbide demand is set to soar with it. That's why STMicro is continuing to grow its production capacity with a nearly $4 billion expansion program.

By getting in front of big trends, this company has become an earnings powerhouse.

Over the past three years, it's grown per-share profits by 51%. And it's expected to close 2023 with an even higher 83% gain.

Even being conservative and using its three-year average, we'd still see earnings double in less than 18 months.

Bottom line: STMicro is a great way to play the global EV boom with a stock that can boost your portfolio over the long haul.

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Sincerely,
Michael Robinson
Michael Robinson

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