I discussed these deliveries with an emphasis on microcontrollers (“MCUs”) (Red Line) in a June 17, 2021 Seeking Alpha article titled “Microchip Technology: Benefiting From Strong Microcontroller Demand And Shortages”, when I attempted to identify the source of the semiconductor shortage.
Chart 1 is an update to the item chart that only went to April 2021 by extending the time frame to December 2021. As can be seen in the chart, in February 2021 all shipments MCUs of other IC types have increased while MCUs have decreased. This led me to several conclusions in the original article:
- MCUs, which cost $3 each and are built into almost every electronic gadget, have been the source of the shortage. Remember, we read everywhere about IC shortages primarily affecting automobiles, but no automotive supplier has actually disclosed which chips were shorted.
- The cause of the MCU shortage is attributed to a fire at a Renesas MCU factory in Japan on March 19, 2021, which followed an earthquake at the same facility in February 2021. The fire destroyed 23 manufacturing equipment from semiconductors and contaminated more than 6,400 square feet of industrial production space.
Indeed, the U.S. Department of Commerce released a January 25, 2022 report titled “Semiconductor Supply Chain Information Request Results,” which:
The specific types of products that we have identified as having significant mismatches between semiconductor supply and demand are used by critical industries, including medical devices, broadband and automotive.
- Microcontrollers consisting mostly of legacy logic chips, including, for example, at 40, 90, 150, 180, and 250 nm nodes
- Analog chips including, for example, at 40, 130, 160, 180 and 800 nm nodes; and
- Optoelectronic chips comprising, for example, nodes at 65, 110 and 180 nm.
So Commerce’s analysis supports my thesis that microcontrollers were a cause of the problem. Although Commerce does not define the percentage by chip type, the chips have microcontrollers at the top and are not listed alphabetically.
Nevertheless, a close look at Chart 1 shows that despite the shortage, MCU shipments have fallen in the past two months and Total Semiconductors (Blue Line) has fallen in the previous two months.
This raises an important question. Why are semiconductor makers cutting shipments even as the semiconductor shortage continues?
automotive semiconductor market
There are other types of semiconductors used in automobiles than microcontrollers. Semiconductor content in automobiles is growing at a CAGR (compound annual growth rate) of 9.6% between 2015 and 2025, as shown in Chart 2, according to our report entitled “Hot ICs: A Market Analysis of Artificial Intelligence, 5G, Automotive and Memory Chips.”
Semiconductor Manufacturer Metrics
Table 1 shows semiconductor companies that have a significant percentage of their total revenue from the automotive sector and are ranked in descending order of “automotive revenue”. The year-on-year performance of these companies’ stocks is also shown, coinciding with the period of semiconductor shortages affecting the automotive industry.
Of the 11 stocks in this chart, only four have positive stock growth over the one-year period, and three of them have growth of less than 10%. Significantly, ON Semiconductor’s stock price has risen 51% over the past year, while AMS and Murata have each fallen about 20%. ON Semiconductor’s (ON) PE ratio of 26.5x is high compared to the US semiconductor industry average of 23.8x, but the forward PE ratio drops to 15.94x.
In Table 2, I present the top 15 automotive companies listed by market capitalization. Table 4.1 also includes 1-year stock price, PE ratio and forward PE ratio.
Ford’s (F) one-year stock price is 56% and its PE ratio is just 4.05x, below the US auto industry average of 9.9x. Its forward PE ratio increases to 9.47x, suggesting that estimated future earnings will be lower.
Key takeaway for investors
A semiconductor shortage has plagued the auto industry for over a year with no end in sight, and various “experts” have predicted the end will come in 2022, or possibly 2023.
I presented my analysis of individual semiconductor sectors in June 2021, noting that microcontrollers were a major contributor to the semiconductor shortage. This was later corroborated by the US Department of Commerce in January 2022.
As the shortage of semiconductors continues, and I’ve shown that unit chip production is declining in chart 1 above, in principle this should positively impact on semiconductor companies and negatively impact car manufacturers. However, this is not the case.
Table 3 shows the average of the metrics for the 10 semiconductor companies in Table 1 above and the 15 automotive companies in Table 2 above. The stock price difference over one year is minimal, as is the Forward PE Ratio.
There is a significant difference in the PE ratio between the two, but this value is skewed by the high PE ratio of Tesla (TSLA) and BYD (BYD) in Table 2 above. Stripping out these two companies’ metrics, the average PE ratio and forward PE ratio drop to values of 8.97x and 7.62x, below the US auto industry average of 9.9x, suggesting that on average and excluding Tesla and BYD, automaker stocks are undervalued.
Which stock(s) is(are) the best investment
While overall automakers may have better financial results than the automotive semiconductor companies listed in the article, ON Semiconductor is better positioned than the others (Table 1).
ON Semiconductor manufactures power and discrete products used in applications such as sensors, imaging, and electric motors. In the field of image sensors, the company holds 40% of the ADAS market. ON earnings have crushed the street consensus hard. One driver of this is ON’s move to silicon carbide (“SiC”) for its automotive IGBT power semiconductors, and this segment will grow with the company’s acquisition of GTAT.
As shown in Chart 3, ON also has higher research quantitative factor alpha grades than Infineon, NXP, Microchip and ST Microelectronics (STM).
Chart 4 shows that ON is ranked third out of 63 semiconductor companies compared to IFNNY at 22, NXPI at 17, MCHP at 33 and STM at 15. ON’s ranking in the information technology sector is ranked 4 out of 573.
For automakers, as shown in Chart 2, Ford’s 1-year stock is up 56%, its PE ratio is only 4.05x and its forward PE ratio is 9.47x. Chart 5 shows that Ford also has higher Seeking Alpha Quant Factor grades than TSLA, Toyota (TM), Mercedes-Benz (OTCPK:DDAIF), General Motors (GM) and Stellantis (STLA).
Chart 6 shows that Ford is ranked 1 out of 28 automakers and 2 out of 476 in the consumer discretionary sector.
Chart 7 shows the gross profit margin (“GPM”) over 3 years for these companies. It shows that although GPMs dropped at the start of COVID, they are now higher than they were pre-COVID.
Electric vehicle companies have been particularly hard hit lately, as traditional ICE automakers increasingly shift to electric vehicles. Electric vehicle sales increased by 108% in 2021 and overall automotive growth, mainly ICE, increased by only 4.6%. For example, Ford is expected to spend up to $20 billion to prepare for its electrification push. This amount of investment is in addition to the $30 billion the company previously disclosed as part of a global commitment for electric vehicles through 2025.