Pick and Shovel EV Play (Hint, Not Tesla)

In light of Tesla’s recent workforce reduction as sales slump, it may seem like a risky play to invest in an EV pick and shovel play but we’re eyeing Infineon, with a market cap of around $43 billion as an opportunity.

It’s a company that is best known for SiC and GaN technologies that are designed to meet rising demand in the sector as a whole. And based on a discounted cash flow forecast analysis it has as much as 42% upside.

Key Points

• Infineon is a semiconductor firm with a focus on electric vehicles and renewable energy, and has a strong financial track record.
• The company leads in developing power semiconductors using advanced materials like silicon carbide (SiC) and gallium nitride (GaN), which are crucial for high-voltage applications.
• It already has a significant market share in automotive semiconductors and is planning to expand in the SiC market.

Is Infineon 42% Undervalued?

Infineon’s financial health remains a cornerstone of its investment appeal. In 2023, the company reported revenues of $17.3 billion.

This financial upswing was noteworthy given that global semiconductor sales saw an estimated contraction of 13%. The revenue boost reflects Infineon’s strategic expansions and emphasis on scaling production capacities in SiC markets.

Management has made it clear that the goal is to capture 30% of the SiC market share by the end of the decade, which should be achieved through investments in Malaysia and Austria.

The impressive revenues have not yet translated to valuation capture with upside to $45.39 per share if a discounted cash flow forecast analysis proves correct.

Technological Leadership

Infineon is a specialist in silicon carbide (SiC) and gallium nitride (GaN), materials that are critical for their superior performance in high-voltage applications across various sectors, including home appliances, automobiles, and industrial machinery.

The shift towards SiC and GaN is particularly relevant in the context of EVs and renewable energy systems, where these technologies drive higher efficiency and performance.

All of this is translating to market share gains, with the company holding an approximate 14% of the automotive semiconductor market, which was valued at over $69 billion in 2023.

In the semi sector, Infineon holds more than a 20% of the market. Such dominance is pivotal as it provides a competitive edge in a highly specialized industry, reinforcing Infineon’s role as a critical player in the broader transition towards electrification and sustainability.

With all that said, it’s worth paying attention to cyclicality in the semiconductor industry. Of all the sectors out there, semis are among the most susceptible to spikes and troughs in consumer demand. The Tesla news also highlights business model vulnerabilities that may disrupt production and cost efficiencies.

Overall though Infineon Technologies is a compelling investment thanks to its strategic positioning in the EV and renewable energy markets, strong financials and growing market share. With clear ambitions to grow and a strategy to reach a market leadership position, it’s potentially a lucrative opportunity to capitalize on the evolution in the automotive sector.