Electric vehicles (EVs) are often in the headlines these days, and for good reason. Companies like Tesla and others are disrupting the massive consumer and commercial vehicle market.
Global EV penetration was only 4.5% in 2020, and EVs only make up 1% of the commercial trucking fleet today. Needless to say, there's a lot of growth ahead. UBS analysts recently raised their expectations for EV sales to 20% of new car sales by 2025 and 50% by 2030.
Major carmakers are getting on board too, with Volkswagen recently projecting 70% of its European sales would be electric by 2030. ACT Research projects commercial vehicles not too far behind, with 25% electric penetration by 2030 and 40% by 2040.
Of course, how are investors to profit from these trends? The obvious way would be to buy EV stocks; however, remember that despite the massive growth of the auto industry over the past century, auto stocks have often been mediocre-to-terrible investments. That's because car-making is competitive, capital-intensive, and cyclical.
That's why the best way to play the explosion of EVs may be in the "picks and shovels" components that go inside EVs. This space is highly technical, often less competitive, and component companies are often more diversified across the semiconductor space. Therefore, they could make better investments than the car-makers directly. Here are two such names that are ready to capitalize on the EV explosion -- but aren't EV companies themselves.
Image source: Getty Images.
II-VI makes a big bet on silicon carbide
A key material powering chips inside electric vehicles is silicon carbide (SiC). SiC-based power semiconductors have extremely high energy conductivity, better thermal management, and a longer life compared with traditional silicon. SiC devices more efficiently convert power to torque in EV powertrains, and will therefore enable electric vehicles to have a longer range and longer life -- two key hurdles to overcome in driving EV adoption.
One way to play the rise of SiC applications is investing in the companies that produce the SiC components and chips directly. While there are a few good choices, one strong candidate is II-VI (COHR -1.56%). II-VI is a diversified materials-maker that has a large business in optical communications components and equipment, but it's investing heavily in SiC applications to power its next leg of growth.
II-VI's internal estimates show the SiC addressable market growing from just half a billion dollars today to a whopping $30 billion by 2030. That's a 50% annualized growth rate. No wonder II-VI plans to invest $1 billion over 10 years to capture the opportunity.
Despite the strong growth prospects, investors can buy II-VI stock nearly 40% below its all-time highs. This year's sell-off could be due to a number of factors, including that very increased spending on silicon carbide that drove underwhelming profit expectations for next quarter. II-VI is also in the process of acquiring rival Coherent (COHR), an acquisition that should help II-VI consolidate the space and drive cost-saving synergies.
However, Coherent was not cheap, and II-VI will be taking on $5.1 billion in debt and $2.15 billion in new equity to buy the company. That appears to have investors worried. In addition, many semiconductors have sold off recently amid cyclical slowdown concerns due to the delta variant.
Yet it seems the stock price may reflect those concerns already, given that II-VI is already down so much from highs. II-VI also has a strong history of integrating acquisitions; while this would be the biggest ever, there's no reason to think the Coherent acquisition will be any different. II-VI already trades at a below-market multiple of 15 times forward earnings. Given the upside potential from SiC over the next decade, II-VI certainly appears to be a "cheap" way to play the growth of EVs.
Image source: Getty Images.
Applied Materials' new ICAPS division is turning heads
Although SiC power chips will be crucial to the growth of EVs, SiC production is somewhat complicated, difficult, and costly. SiC has more inherent defects than traditional silicon, and also needs to be treated with dopants in order to turn it from an insulator into a semiconductor.
Fortunately, semiconductor equipment maker Applied Materials (AMAT -2.79%) just unveiled a new advanced machine that can make larger 200mm SiC wafers with vastly fewer defects. Last week, Applied introduced its new Mirra Durum CMP system, which "integrates polishing, measurement of material removal, cleaning and drying in a single system." The new system boasts a 50-fold reduction in defects and three-fold reduction in roughness compared with legacy solutions.
Although primarily known for its equipment designed to produce leading-edge logic and memory chips, Applied's management has made a point of touting its newly formed ICAPS division, which stands for Internet of Things, Communications, Automotive, Power, and Sensors. These chips are typically produced on lagging-edge nodes, but should see an explosion as the Internet of Things produces a tsunami of data in the decade ahead. In fact, Applied Materials projects a 100-fold increase in data generation between 2018 and 2025, largely due to machines now producing more and more data relative to humans.
On the conference call with analysts, Applied's management noted ICAPS machine sales were set to more than double this year, and that ICAPS machines were accretive to the company's overall margins, which are already very high. Smarter, more autonomous, and more electrified vehicles and industrial factories will emerge over the next decade, and that benefit should filter down to Applied's financials.
Trading at just 17 times this year's earnings estimates, Applied Materials, like II-VI, appears to be a "cheap" way to play the explosion of EVs -- certainly much cheaper than the high-priced EV-makers that tend to steal today's headlines.
