The electric vehicle market encountered a big slowdown last year, and with it, the chipmakers who specialize in the power semiconductors crucial for EVs.
But some interesting commentary from two key EV chipmakers this earnings season offer hope not just for an EV recovery, but also that new power-efficient chip technologies may be adopted more and more in power-hungry AI data centers.
With the following two stocks down 34% and 45% below their highs and trading a low earnings multiples, an EV recovery could send their stocks higher, and new AI demand could add fuel to the fire.
Axcelis and On are known for Silicon Carbide
On Semiconductor(NASDAQ: ON) and Axcelis Technologies(NASDAQ: ACLS) are on the forefront of silicon carbide technology, which should be a high-growth market for years to come.
Of note, silicon carbide is an infused type of silicon that has higher conductivity, heat dissipation, and greater resilience in extreme conditions than traditional silicon. Therefore, it is thought to be needed in applications where high temperatures and efficiency are crucial, such as electric vehicles. However, silicon carbide is a tricky material to work with, which is why it hasn't found its way into every mainstream device.
Axcelis is a major supplier of ion implant devices, or machines that infuse silicon with another atom's ions, changing the properties of the silicon. Its machines are already used in the production of power devices, but SiC is perhaps Axcelis' biggest growth market. In addition, Axcelis' machines are also used in memory production, albeit in smaller amounts.
On Semiconductor uses Axcelis' machines to produce SiC power chips themselves. While there are about a half dozen global leaders pursuing silicon carbide dominance, On seems to have an early lead on the technology. The company already has 35% to 40% market share, and is growing at twice the rate of the SiC market generally.
Despite their leadership in this long-term growth field, both stocks have been hit by the current downturn in the EV market, which has delayed investments down the supply chain. Yet even in the EV bear market, both companies are still handily profitable. On has maintained a 22.4% operating margin last quarter and made net income of $338 million, while Axcelis had a 20.5% operating margin and made $51 million, in what could be the low quarters of this downturn.
That level of profitability even in a downturn has enabled each company to lower their share counts via share repurchases. Those buybacks look like a smart move, with On trading at just 17.4 times earnings and Axcelis trading at just 15.1 times earnings, with current earnings levels close to bottoming.
Image source: Getty Images.
But energy-hungry AI data centers may begin using silicon carbide
As of today, the electric vehicle and electric industrial markets dominate revenues for both Axcelis and On. However, each has a tantalizing new opportunity in AI data centers.
AI-supported prompts require 10 times the power of a regular search request, and AI data centers are supposed to accelerate electricity demand through the rest of the decade, after a decade in which U.S. power demand didn't grow at all. According to Goldman Sachs(NYSE: GS), data centers will go from 3% of U.S. power consumption to 8% by 2030.
In June, On unveiled a silicon carbide product specifically designed for AI data centers to help manage data center power more efficiently. Power is converted four different times between the energy grid and AI processors in data centers, and those conversions causes power leakage of 12% on average.
However, according to On, replacing traditional silicon power converters with its new EliteSiC 650V solution can reduce that power loss by 1%. 1% may not sound like much, but when one is talking about the huge amount of power and scale for AI data centers, it adds up to a lot. If that 1% reduction in energy loss were extrapolated to all data centers globally, it could save enough electricity to power one million homes for a year.
While a small part of revenue today, at its recent analyst day, On forecast 22% average growth for its data center business over the next five years.
Meanwhile, Axcelis management also alluded to On's new product on its own earnings call. CEO Rusell Low noted, "we've seen customers announce new Silicon Carbide-based trench MOSFET products targeting AI data centers, which is an attractive opportunity for Axcelis, given the high implant intensity associated with trench technology."
AI not priced in
The AI opportunity in On and Axcelis doesn't appear to be priced in, given that their stocks have fallen even as AI-centered stocks have taken off this year. That's because the EV market is in a downturn.
But with interest rates set to decline, helping out car buyers, and EV technology improving every year, it's possible that market could be in for a turnaround. And if data centers begin to use silicon carbide more often as their energy needs grow, that could add another bit of upside to the recovery. All in all, these two companies look like cheap ways to play both the electrification and AI trends.
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Billy Duberstein and his clients have positions in Axcelis Technologies and ON Semiconductor. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool recommends ON Semiconductor. The Motley Fool has a disclosure policy.
