Instead of EV actions, consider these 3 smart actions
With so many electric vehicle (EV) stocks that went public last year – some of them with uncertain futures – it might be difficult to pick a winner. But here’s an alternative: semiconductor stocks. Semiconductors are the building blocks of all technology, and they are gobbling up suppliers to the automotive industry. Electronic components are estimated to have fallen from 22% of the cost of producing a car in 2000 to 35% in 2010, to around 40% today – and could reach 50% by the end of this decade.
Obviously, the already well-established but still rapidly growing semiconductor industry is a great way to bet on electric vehicles and other automotive technologies without having to choose which automaker will be the biggest winner. Three chip stocks to consider are NXP semiconductors (NASDAQ: NXPI), Skyworks Solutions (NASDAQ: SWKS), and Semiconductor manufacturing in Taiwan (NYSE: TSM).
NXP: A Leading Supplier for Auto Parts
NXP Semiconductors is one of the automotive industry’s most concentrated electronics suppliers. In fact, in its most recent quarter, it reported that 49% of its sales went to automakers, and that segment has exploded 87% year over year.
Certainly, the big boost to NXP’s automotive business can be attributed to the fact that automakers were stranded last spring when the pandemic began. With vehicles rolling off the assembly lines in droves to meet booming demand this year, it’s no wonder that NXP has industry backing. However, this is more than a single story.
As has already been discussed, technology is absorbing an increasing share of the cost of producing a vehicle, and NXP is at the forefront of this movement. It provides all kinds of circuitry that goes into the production of modern cars or trucks, from the electrification of the powertrain and on-board connectivity to the infotainment system. And the company is constantly improving its hardware designs, as well as its manufacturing capabilities (including three factories here in the United States), to better support its customers.
In the second quarter of 2021, NXP said revenue and adjusted operating income grew 43% and 121% year-over-year, respectively, mainly driven by autos. For the third quarter, he expects revenues to grow another 22% to 29% year over year, with profit margins remaining at or improving slightly at second quarter levels. The stock is trading at a modest 26 times, after 12 months of free cash flow after the last report. NXP is also sweetening the deal with a 1.1% dividend yield and returning additional cash through share buybacks. Considering the long-term growth opportunity this leading automotive supplier has ahead of it, it looks like a buy-in of top-tier chips right now.
Skyworks Solutions: bet on a new automotive technology through an acquisition
Skyworks Solutions is a designer of connectivity chips best known for providing radio frequency components and associated circuitry for Apple and other smartphone manufacturers. This has been a hot market for Skyworks lately, and it is launching 5G network chips so consumers can connect to the next-gen network.
But Skyworks has also grown its business outside of smartphones, expanding into areas it calls “big markets” such as Wi-Fi connectivity, smart audio, and industrial and automotive chips. Major markets grew 50% year-over-year in the last quarter and account for around one-third of Skyworks total sales.
And the segment is about to get a big boost. Skyworks has just completed the acquisition of Silicon Laboratories‘ (NASDAQ: SLAB) infrastructure and automobiles for $ 2.75 billion. This breaks new ground on several new fronts for the leader in connectivity chips, including electric vehicles and the automotive industry as a whole. The infrastructure and automotive business includes engine control components, power management, and connectivity infrastructure (which also goes into the design of modern vehicles to help various systems in the car communicate with each other) . This puts Skyworks on the map of the electric vehicle industry in a potentially important way, with a robust product portfolio for the electronics needs of many automakers.
Skyworks is growing rapidly and generating high profitability, with adjusted operating margins of 36% last quarter. The stocks pay a 1.2% dividend and trade 28 times over 12 months of free cash flow, a real long-term value given the multiple levers for growth the company has over the next decade.
Taiwan Semiconductor Manufacturing: The World’s Largest and Most Advanced Chip Manufacturer
When it comes to semiconductor giants, look no further than Taiwan Semiconductor Manufacturing (TSM). The company has achieved an incredible $ 48 billion in revenue in the past year (although it still lags behind Intelligenceof $ 78 billion in sales, the industry leader), and continues to grow at a rapid rate (Intel, not so much).
TSM has the most advanced chip manufacturing capabilities. Its 7 and 5 nanometer technology foundries (making the smallest, most fuel-efficient designs on the market) accounted for half of all revenue in the second quarter of 2021. As automotive technology advances and needs grow. complex (for EV powertrains, advanced safety and auto-driving systems, on-board connectivity, etc.), TSM’s automotive end markets will grow. In fact, management attributed the 20% year-over-year growth in the last quarter to the premium IT and automotive divisions.
While it’s hands down on the chipmaking front, TSM isn’t resting on its laurels. The company’s 4 and 3 nanometer chip foundries are set to start up in 2022, representing even more compact and energy-efficient semiconductor designs that will eventually lead to more advanced automatic capabilities, while consuming less capacity. battery. For electric vehicle manufacturers, increasing vehicle range on a charge is a critical part of winning the battle for consumer attention, so the auto industry certainly has a vested interest in it. enhancing TSM’s prowess in building more energy efficient silicon.
TSM stock is trading at a high price relative to free cash flow of 65 times 12 month earnings. Part of the reason is that the company is overtaking last year’s depressed earnings during the first round of economic lockdowns, and is also spending at a high rate right now to bring online capacity to additional manufacturing (such as a new facility in Arizona). But that metric will improve over the next few quarters as TSM grows steadily and a dividend that currently pays 1.5% doesn’t hurt. This semiconductor industry leader is brimming with net cash and has a clear roadmap to further develop in the market for electric vehicles and other related technologies over the coming decade.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.