Power controllers may not sound as thrilling as artificial intelligence (AI) services or number-crunching microchips, but the tech world would stop without them. As such, investors should pay close attention to power semiconductor specialists.
You're about to enjoy three great power management investments in April 2024, presented by three longtime Motley Fool contributors with deep expertise in the tech sector. Read on to see how these companies power the tech booms around us, and why they could be fantastic long-term investments today.
If EV sales regain their footing, this company will generate monster cash flow
Billy Duberstein(ON Semiconductor): Amid the electric-vehicle (EV) slowdown, ON Semiconductor's (NASDAQ: ON) stock has taken a 40% plunge from its highs and now trades at just 13.2 times earnings. Sure, the near-term looks murky, and earnings may decline slightly this year. But over time, battery technology should improve and electric vehicles should continue their ascent as a percentage of the global vehicle market.
Critical to faster charging times and EV range will be silicon carbide-based (SiC) semiconductors, and onsemi is currently leading the field of six or so competitors for these types of chips. That's no small feat, as SiC is a difficult material to produce and manufacture at good yields and hadn't been produced in mass volumes prior to the EV revolution.
The strong investment behind SiC and intelligent power and industrial chips, along with an intentional pivot away from lower-growth and more commoditized chips, was the strategy put forth by CEO Hassane El-Khoury, who was installed in late 2020 by activist investor Starboard Value. He's largely been successful in improving the company's margins and growth prospects.
In addition, onsemi projects that its SiC revenue will grow at twice the rate of the overall silicon carbide market over time, achieving 35%-40% SiC market share by 2027 when electric vehicles may be hitting an inflection point beyond early adopters. Overall, onsemi's concentration in intelligent power and intelligent sensing chips for auto and industrial applications should allow it to grow between a 10% and 12% annualized rate between 2022 and 2027, according to the company.
Moreover, since that growth also incorporates the phase-down of its legacy business outside these verticals, negatively contributing to those overall growth figures, onsemi has the potential to maintain that growth rate beyond 2027 as higher-growth auto and industrial chips will then make up a larger part of the business.
Based upon onsemi's 2027 targets for revenue growth and improving free-cash-flow margins to reach between 25% and 30%, the company could theoretically be making $3.5 billion in free cash flow in 2027, relative to its $27.8 billion market cap today. That's only around 8 times those future cash-flow projections four years out. Moreover, onsemi is still generating cash and repurchasing stock today, so the company should have a lower share count by that time.
Of course, onsemi has to execute, and today's market is very skeptical of EV-related chip stocks, given the sudden slowdown last year. But assuming this is just a bump in the road, so to speak, and EVs resume their growth later this decade, onsemi's stock looks super cheap.
How NXP semiconductors power up exciting industries
Anders Bylund (NXP): You might think of NXP Semiconductors(NASDAQ: NXPI) as a leading maker of automotive computing chips, mobile networking solutions, and identity-management products. The Dutch-American company is all of that and more. For instance, NXP is an experienced leader in power management and power control semiconductors, stretching back to its early days as the semiconductor arm of Philips.
These days, power semiconductors generally fall under three reportable business segments for NXP.
In the industrial division, the company's power controllers are found in both professional manufacturing machinery and shelf-ready final products.
The auto industry uses NXP's battery management chips, digital on/off switches, and flexible charging controllers.
With the communications infrastructure business, NXP supplies robust power controllers for radio-signal base stations such as 5G wireless signal towers.
The company doesn't report power products as a separate business unit, but these products play important roles in many of NXP's most exciting growth markets. From electric cars and 5G wireless networks to flexible industrial robots, NXP's chips do more than you think -- including these crucial power management functions.
NXP reached this enviable position without whipping investors into a bullish frenzy. The stock trades at a modest 20 times earnings and 4.2 times sales and has gained roughly 24% over the last 52 weeks. By comparison, the average stock in the Nasdaq 100 market index (where NXP is an active component) trades at 34 times earnings and 5.5 times sales, looking back at an average full-year price jump of approximately 38%.
In other words, NXP strikes me as a bargain-bin play on thrilling growth markets such as 5G networks and electric vehicles. And it wouldn't be the same without its power management expertise.
A little-known power equipment maker with big upside from AI
Nicholas Rossolillo (Advanced Energy Industries): The world is abuzz with rapid advancements in AI in data centers, as well as other applications like manufacturing automation and surgical robotics. There are even new semiconductor manufacturing techniques needed to make the chips that make AI possible.
However, as AI computing demands more power, there's growing concern about where the energy will come from. One solution: Make more energy-efficient equipment.
That's where Advanced Energy Industries (NASDAQ: AEIS) comes in. Whether its high-performance power modules for hydrogen and solar systems, energy grids, robotic machines, semiconductor manufacturing equipment (like ultra-high-energy plasma), medical equipment, or data center power, Advanced Energy has it all.
Last year was a transition year, as the company's customers were working down excess inventory of power modules and other parts needed to build final products. But by the second half of 2024, Advanced Energy expects it will be back in growth mode and is making a push for higher profit margins. Data center AI and a coming global expansion of chipmaking supply could propel this company higher.
While the stock has been fairly pedestrian due to supply chain disruptions since 2020, it's been a market-beating stock over the last decade. This could make it attractive for investors looking to bet on higher energy demands who don't want to play the extreme cyclical nature of the oil and fossil-fuels industry.
Even after the downturn in 2023, Advanced Energy shares are trading for about 23 times trailing 12-month free cash flow. If the next spate of growth is imminent starting in 2024, this could be a top way to play the AI and computing tech power boom. This one's on my watchlist.
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Anders Bylund has positions in NXP Semiconductors. Billy Duberstein has no position in any of the stocks mentioned. Nicholas Rossolillo has positions in ON Semiconductor. The Motley Fool recommends NXP Semiconductors and ON Semiconductor. The Motley Fool has a disclosure policy.
