What happened
Shares of power semiconductor stocks crucial to the growth of electric vehicles, such as Aehr Test Systems (AEHR 1.50%), Axcelis Technologies (ACLS 3.06%), and Wolfspeed (WOLF 5.55%), all had tough months in September. The aforementioned stocks were down 10.4%, 15.1%, and 20.3% for the month, respectively, according to data from S&P Global Market Intelligence.
Virtually all technology and semiconductor stocks sold off in September, largely due to profit-taking after impressive first-half runs, in combination with rising long-term bond yields.
In addition, each of these companies is targeting the high-growth electric vehicle industry. But some recent data points suggest the EV market may be slowing down, which is more concerning.
So what
These three stocks have certain things in common, but the two equipment manufacturers Aehr and Axcelis have had a staggeringly different performance from Wolfspeed in 2023:
Aehr and Axcelis are semiconductor equipment makers, with Aehr being a leader in wafer test and burn-in solutions and Axcelis being a leader in ion implantation equipment. Both of these technologies are crucial to the production of silicon carbide (SiC) and gallium nitride (GaN), materials that have higher heat resistance and greater conductivity at extreme temperatures than traditional silicon-based chips. Thus, both materials are assumed to see hypergrowth this decade as these materials go into electric vehicles and clean energy infrastructure.
That's why Axcelis has seen its revenue accelerate over the past two years and why Aehr just forecast more than 50% growth in the current fiscal year that ends in May 2024.
So why has Wolfspeed fallen since it's gone "all in" on becoming a large SiC chipmaker? Well, Wolfspeed is one of the companies buying all of these Axcelis and Aehr machines as part of a current fab buildout in both New York and North Carolina. That fab investment is tremendously expensive, and those costs have exceeded Wolfspeed's legacy chip revenues, which has resulted in large losses that reached $330 million last quarter alone.
So, if Wolfspeed has a different profile from Aehr and Axcelis, why did all three fall last month? Well, Aehr's and Axcelis' recent success caused their valuation multiples to expand to 52-week highs, with Aehr beginning the month trading around 100 times earnings and Axcelis at 30 times earnings -- the high end of each stock's recent historical range.
AEHR P/E Ratio data by YCharts.
September also saw long-term Treasury bond yields rip higher, with the yield on the 10-year Treasury increasing from roughly 4.1% to 4.7% in the span of just one month. That's a tremendous move higher in a single month for government bond yields. Since stock valuation multiples are affected by government bond yields, with many using the 10-year bond as a baseline for a discount rate, the higher bond yields go, the less stocks are worth -- especially expensive high-multiple stocks with profits far out in the future.
Thus, it was no surprise to see these stocks pull back. But even worse than high-multiple stocks are loss-making stocks like Wolfspeed, with no present earnings at all. So, not only do higher bond yields decrease the present value of future assumed earnings, but higher interest rates can make it more difficult and expensive to raise money to build large projects, as Wolfspeed is doing.
While Wolfspeed has actually done a fairly good job of securing funding through debt and customer pre-payments earlier in the year, its ongoing losses still pose a bigger risk in the higher-rate environment.
In addition to rates, there may also be some trepidation around the growth trajectory of EVs. Recent months have seen buyers pull back from electric vehicles, with EV inventories building up in the U.S. and Europe. In fact, Tesla (TSLA -1.11%) saw its deliveries decrease quarter-over-quarter. The company attributed the slowdown to factory maintenance. However, other EV makers have also seen EV inventories pile up. Ford disclosed in August that it had about 110 days of inventory for its Mustang Mach-E SUVs, well above the industry average of 38 days. And Volkswagen just halted production of two of its EV models in late September, citing weaker demand.
Silicon carbide stocks sold off amid surging interest rates and waning demand for electric vehicles. Image source: Getty Images.
Now what
Buying high-multiple or unprofitable stocks is risky, especially in a rising-interest-rate environment. So, it was no surprise to see these stocks pull back in an otherwise quiet news month.
More concerning is the plateauing EV sales, especially since EV makers have been cutting prices all year. EVs tend to be a bit more expensive than internal combustion cars, and higher rates make buying a car with a loan even less affordable. It's also possible electric vehicle adoption has exhausted the "low-hanging fruit" of early adopters and may see difficulty penetrating mass markets.
Whether the slowdown marks just a speed bump on the way to higher EV penetration or the start of something worse remains to be seen.
Of the three stocks, Axcelis looks like the least risky here, as it now trades at a reasonable multiple and just announced a $200 million share repurchase program in mid-September, perhaps seeking to take advantage of the market dip.
