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Lithium production is rapidly increasing alongside the establishment of lithium refineries such as those built by Tesla (TSLA), which CEO Elon Musk has called a “license to print money”. These refineries offer the opportunity to process lower quality lithium, which is more abundant, into batteries suitable for electric cars. At the same time, hedge fund managers and analysts see promise in another aspect of EV power: silicon carbide chips.
The electric vehicle (EV) revolution is gaining momentum, as recent research by Morgan Stanley (MRS) indicates that EVs already account for 8% of global car sales. With projections showing a potential increase to 35-40% by 2030, beating previous estimates of 25-30% from just three years ago, the EV market is poised for substantial growth.
As the EV market continues to thrive, investors are eagerly awaiting the industry’s equivalent of the oil boom. While lithium and cobalt have received a lot of attention, investors have poured money into companies like Albemarle (ALB) and the Global X Lithium & Battery Tech ETF (LIT), it is important to note that these resources are not much different from other resources such as potash or orange juice.
What Are Silicon Carbide Chips?
Shahar Cohen is the founder of Lucid Capital, a hedge fund specializing in mid-cap stocks that outperformed the Nasdaq by 17% over the past year. Cohen suggests that Silicon Carbide (SiC) chips are the new secret sauce in the EV industry. SiC wafers are a fusion of silicon and carbon, created through a baking process in ovens with temperatures of up to 2000 degrees Celsius (similar to the outer surface of the sun).
SiC transistors boast superior power switching capabilities and less leakage, while SiC-based inverters enable EVs to charge in just 7 minutes, increase their range by 5-10% and reduce battery life by 10%. ON Semiconductor (ON) predicts that the SiC market will experience a compound annual growth rate (CAGR) of 33% between 2022 and 2030, surpassing the growth rates of CPUs in the 1990s and mobile processors in the 2000s (20% and 18%, respectively) CAGR).
However, SiC wafer manufacturing and chip fabrication is a complicated and complex process that requires expertise and know-how. As CEO of Wolfspeed (WOLF) emphasized in Q4 2022: “It is certainly not for the faint of heart. That brings many challenges.”
As a result, the SiC wafers require many steps in the semiconductor factories. One of the most crucial steps comes into play in the production of Silicon Carbide (SiC) wafers called Epitaxy. Epitaxy involves the precise deposition of thin layers of material on a substrate, creating high-quality crystalline structures with the desired properties.
Who makes SiC chips?
According to Cohen, only three companies worldwide supply epitaxy machines for SiC wafers. One company to keep an eye on in this arena is Aixtron (AIXXF), a leading supplier of deposition equipment, which has emerged as a key player in the development of epitaxy technology.
Aixtron’s power electronics business, which includes SiC and GaN, has experienced significant growth and accounted for 50% of sales in 2022 compared to 5% in 2018. Shahar Cohen estimates that Aixtron’s revenues will reach EUR 620 million in 2023 amounts, a significant increase from the 260 million euros in 2019, which will be largely driven by its SiC Epitaxy machines. As the company implements price increases and benefits from economies of scale in manufacturing, Aixtron is expected to expand its EBIT margin from 23% in 2021 to 27% in 2024. At a valuation of EUR 3 billion, the stock is currently trading at a reasonable expected price /earnings ratio. from 18.
SiC chips – huge potential opportunity
In short, while lithium remains a critical resource in electric vehicle production, it is still a low-value-added commodity. Silicon carbide (SiC) chips are emerging as a game-changer, offering improved performance and enabling significant advances in EV technology.
However, the challenges associated with SiC wafer manufacturing and chip fabrication emphasize the need for advanced picks and shovels. Aixtron’s represents a potential opportunity to address the industry’s key bottleneck and position itself as a critical player in the race to electrification.
