Let's Talk Chip Stocks

Brit Ryle

Posted November 1, 2023

I call them “Diamond Chips.” Because they are made from the same super-hard material that can be used to make artificial diamonds – silicon carbide, or SiC. 

You’ll see semiconductors made from silicon carbide get referred to as SiC chips.

SiC chips are extremely hard and heat resistant – they work just fine at temperatures as high as 200 degrees celsius – heat that would melt other chips. Diamond chips can handle 10 times the voltage of regular silicon chips. And they are faster…

This is why Diamond Chips are especially good for Electric Vehicles (EVs) and power transfer (like on the grid).

Now, we’ve been hearing that demand for EVs has gotten a little slack. And so you’d expect any weakness for EVs to show up with the companies that make SiC chips, right? Well, yes and no. 

Two of the primary SiC chip companies are ON Semiconductor (NASDAQ: ON) and Wolfspeed (NASDAQ: WOLF), formerly known as Cree Semi. Both companies reported third quarter earnings last week. And their reports were like night and day…

The Wall Street Journal reported OnSemi said it was seeing order “pushouts” even from automotive customers who struck long-term supply agreements with the company, while a sharp reduction from one major buyer took about 20% off its shipping target for silicon carbide chips this year. Analysts widely believe that customer to be Tesla.

OnSemi’s stock got crushed by more than 20% after its earnings report.

But on the other hand, about Wolfspeed, the Journal said Wolfspeed used its [earnings conference] call to describe “very, very heavy demand” for silicon carbide—adding that its CEO now fields weekly calls from customers seeking more. …the company’s silicon carbide wafers are “far and away the best” in the industry.

Wolfspeed’s stock rallied more than 20% after its earnings report.

Like I said – night and day. 

So what do we make of this divergence? Well, for one thing, Tesla (NASDAQ: TSLA) founder Elon Musk says he doesn’t want to use SiC chips, and has a workaround. And maybe the fact that OnSemi saw a big reduction from a major buyer thought to be Tesla is proof that Musk has indeed found a way to at least use fewer SiC chips. 

Another takeaway is that the EV market is still very young. There’s going to be ups and downs and it’s not a good idea to take a scattershot approach to investing in the EV sector. Investors need to take each EV company on a case by case basis. That’s true for the charging stations stocks like Blink (NASDAQ: BLNK) and ChargePoint (NASDAQ: CHPT), it’s true for the chip stocks, it’s true for the EV makers and it will be true for the upstart battery stocks, like Quantumscape (NASDAQ: QS) and Enovix (NASDAQ: ENVX). 

Testing 1,2,3 Testing

A couple weeks ago, I told you to keep on eye on AEHR Systems (NASDAQ: AEHR). The company makes test systems for SiC chips. SiC chips are harder to make than regular silicon chips, failure rates are higher so testing is critical. AEHR’s revenue has doubled over the last year and is expected to grow another 50% in 2024. 

It was $31 or so when I mentioned it. But guess what happened after that disastrous OnSemi earnings report? Yeah, crushed. Because clearly, if there’s less demand for SiC chips, there will be less demand for the testing systems that make sure they work right. 

But, with a ~25% beatdown, Aehr Systems now trades with a forward P/E of 15. Much better, and probably downright attractive. I may be adding Aehr Systems to the Pro Trader Today recommended buy portfolio soon.

I’ve already recommended another semiconductor test equipment company Teradyne (NYSE: TER). Teradyne has the bonus of also making industrial robots, but since we’re on the subject of chips, I’ll leave the robot part for another day…

Now I recommended Teradyne to you at $96. It’s lower, $84 or so as I write, after reporting Q3 earnings last week. Like with the SiC chip companies, there are some demand issues within the sectors that Teradyne serves. 

Here are the broad strokes from the conference call:

In semiconductor test, …our automotive test shipments remain high in Q3. Memory test shipments in Q3 were down sequentially due to the timing of shipments, but demand remains strong. LPDDR5 and HBM, both of which require higher speed testers drove the results.

In Wireless, demand remained muted in the quarter given the weak smartphone market and lack of new wireless standards this year. In System Test, defense and aerospace and storage test groups were on plan, while production board test softened in the quarter. 

Please note what Teradyne says about the weak smartphone market. That may not bode well for companies like Apple (NASDAQ: AAPL) and especially its suppliers like Qualcomm (NASDAQ: QCOM)

Teradyne did offer a glimmer of hope for defense and aerospace, saying they expected increased spending for defense especially. I’m not so bullish on defense spending, because an increase in defense has to come from Congress and I’m not sure what we can really trust Congress to accomplish these days…

One thing from Teradyne that really jumped out at me was the comment about memory chips and HBM…

Bullish on Micron

HBM stands for High Bandwidth Memory. It’s basically a faster memory chip, and Micron’s HBM3 is the fastest. Rumor has it that Micron’s HBM chips will start getting bundled into Nvidia’s AI chips next year. 

AMD has a new AI chip coming, and CEO Lucy Sui said she expected $2 billion in revenue for the new chip next year. AMD was up big today on the news – nearly 10%. The rising AI chip tide took Nvidia (NASDAQ: NVDA) higher by $15 too. You know who else had a good day? Micron (NYSE: MU)…

Rival memory maker Samsung just offered up a pretty bullish forecast for memory chips going forward. Specifically, Samsung said memory prices have already bottomed. And Micron’s 2023 revenue has been cut in half due to that very issue.

So, I see a formula for upside for Micron: stronger memory prices + bundling with Nvidia + possible bundling with AMD = higher share price. 

That’s it for me today, take care and I’ll talk to you Friday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today
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