Lithium production is increasing rapidly, along with the establishment of lithium refineries like the one built by Tesla (TSLA), which CEO Elon Musk called a “license to print money.” These refineries offer the possibility of transforming lower quality lithium, which is more abundant, into batteries suitable for electric vehicles. At the same time, hedge fund managers and analysts see promise in another aspect of powering electric vehicles: silicon carbide chips.
The electric vehicle (EV) revolution is gaining momentum, as recent research from Morgan Stanley (MS) indicates that electric vehicles already account for 8% of global car sales. With projections showing a potential increase of 35-40% by 2030, surpassing previous estimates of 25-30% made just three years ago, the electric vehicle market is poised for substantial growth.
As the electric vehicle market continues to boom, investors are eagerly looking for the equivalent of the oil boom in this sector. While lithium and cobalt have received particular attention, with investors pouring funds into companies like Albemarle (ALB) and the Global X Lithium & Battery Tech ETF (BED), it is important to note that these products are not very different from other resources such as potash or orange juice.
What are silicon carbide chips?
Shahar Cohen is the founder of Lucid Capital, a mid-cap equity hedge fund that has outperformed the Nasdaq by 17% over the past year. Cohen suggests that silicon carbide (SiC) chips are the new secret sauce in the electric vehicle industry. SiC wafers are a fusion of silicon and carbon, created by a process of firing in furnaces at temperatures reaching 2000 degrees Celsius (comparable to the outer surface of the Sun).
SiC transistors have superior power switching capabilities and reduced leakage, while SiC-based inverters allow electric vehicles to recharge in just 7 minutes, extend their range by 5-10% and reduce the battery size by 10%. ON Semiconductor (ON) predicts that the SiC market will grow at a compound annual growth rate (CAGR) of 33% from 2022 to 2030, exceeding the growth rates of CPUs in the 1990s and mobile processors in the 2000s (20% and 18% CAGR, respectively).
However, the production of SiC wafers and the fabrication of chips is a complex and complex process that requires expertise and know-how. As CEO of Wolfspeed (WOLF) pointed out in Q4 2022, “It’s definitely not for the faint-hearted. It comes with a lot of challenges.
Therefore, SiC wafers require many steps in semiconductor manufacturing plants. One of the most crucial steps plays a role in the production of silicon carbide (SiC) wafers called epitaxy. Epitaxy involves the precise deposition of thin layers of materials onto a substrate, creating high quality crystal structures with desired properties.
Who manufactures SiC chips?
According to Cohen, only three companies worldwide provide epitaxy machines for SiC wafers. One company to watch in this area is Aixtron (AIXXF), a leading supplier of deposition equipment, which has established itself as a key player in the development of epitaxy technologies.
Aixtron’s power electronics business, which encompasses SiC and GaN, has seen significant growth, accounting for 50% of revenue in 2022 compared to 5% in 2018. Shahar Cohen estimates that ‘Aixtron in 2023 will reach 620 million euros, a substantial increase from 260 million euros in 2019, which will be largely driven by its SiC Epitaxy machines. With the company implementing price increases and benefiting from economies of scale in production, Aixtron is expected to increase its EBIT margin from 23% in 2021 to 27% in 2024. At a current valuation of €3 billion, the stock is trading at a reasonable forward P/E. of 18.
SiC Chips – Huge Potential Opportunity
In conclusion, although lithium remains an essential resource in the production of EVs, it remains a commodity with low added value. Silicon carbide (SiC) chips are changing the game, delivering improved performance and enabling significant advancements in electric vehicle technology.
However, the challenges associated with SiC wafer production and chip fabrication highlight the need for sophisticated picks and shovels. Aixtron represents a potential opportunity to tackle the industry’s biggest bottleneck, positioning itself as a pivotal player in the race to electrification.