The production of lithium is increasing rapidly, in parallel with the construction of lithium refineries like that of Tesla (TSLA), which CEO Elon Musk has called a “license to print money.” These refineries offer the opportunity to process low-grade lithium, which is more common, into batteries suitable for electric vehicles. At the same time, hedge fund managers and analysts are seeing potential in another aspect of powering electric vehicles — silicon carbide chips.
The electric vehicle (EV) revolution is gaining momentum, according to a recent study by Morgan Stanley (MS) shows that electric vehicles already account for 8% of global car sales. Projections indicate a potential increase to 35-40% by 2030, beating previous estimates of 25-30% just three years ago. The electric vehicle market is poised for significant growth.
As the electric vehicle market continues to thrive, investors are eager to see the equivalent of the oil boom in the sector. While lithium and cobalt have received a lot of attention, investors are pouring money into companies like Albemarle (ALB) and the Global X Lithium & Battery Tech ETF (LIT) it is important to note that these commodities are not significantly 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 stock hedge fund that has outperformed the Nasdaq by 17% over the past year. Cohen points out that silicon carbide (SiC) chips are the new secret recipe in the electric vehicle 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 (comparable to the outer surface of the sun).
SiC transistors have superior power switching capabilities and lower losses, while SiC-based inverters allow EVs to charge in just 7 minutes, increase their range by 5-10% and reduce battery size by 10%. ON Semiconductor (AT) predicts that the SiC market will register a compound annual growth rate (CAGR) of 33% from 2022 to 2030, surpassing the growth rates of CPUs in the 1990s and mobile processors in the 2000s (20% and 18% CAGR, respectively) will surpass.
However, SiC wafer production and chip manufacturing is a complicated and complex process that requires expertise and know-how. As CEO of Wolfspeed (WOLF) emphasized in the fourth quarter of 2022: “It's definitely not for the faint of heart. It brings with it many challenges.”
Therefore, the SiC wafers require many steps in the semiconductor factories. One of the most crucial steps involved in the production of silicon carbide (SiC) wafers is epitaxy. With epitaxy, thin layers of material are precisely deposited on a substrate, resulting in high-quality crystalline structures with the desired properties.
Who Makes SiC Chips?
According to Cohen, only three companies worldwide supply epitaxial machines for SiC wafers. One company to watch in this space is Aixtron (AIXXF), a leading deposition equipment supplier that has become a major player in the development of epitaxial technology.
Aixtron's power electronics business, which includes SiC and GaN, saw significant growth and accounted for 50% of sales in 2022, compared to 5% in 2018. Shahar Cohen estimates that Aixtron's sales will reach €620 million in 2023 , a significant increase compared to the 260 million euros in 2019, which will largely be attributed to the SiC epitaxial machines. As the company implements price increases and benefits from economies of scale in production, Aixtron is expected to increase its EBIT margin from 23% in 2021 to 27% in 2024. With a current valuation of 3 billion euros, the stock is trading at a reasonable expected P/E ratio from 18.
SiC chips – huge potential
In summary, while lithium remains an important resource in EV production, it is still a low-value-added commodity. Silicon carbide (SiC) chips are proving to be game changers, offering improved performance and enabling significant advances 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 address the industry's biggest bottleneck and position itself as a key player in the electrification race.