2023-11-29 02:07:25 ET
Summary
- Coherent, through Finisar, has been the leading manufacturer of optical network transceivers for the past 22 years used in AI-related datacom applications.
- Coherent has a leading position in Silicon Carbide wafer production used to make advanced chips for the EV automobile market.
- Coherent’s position in AI-related Datacom 200+G transceivers and silicon carbide are two of the strongest growing sectors in the marketplace, overcoming exposure to cyclical markets.
Coherent ( COHR ) announced its Fiscal Q1 2024 earnings on November 7, 2023. Revenue was $1.053 billion, slightly above the midpoint of its $1.0 – 1.1 billion guidance. Non-GAAP EPS of $0.16, was above the midpoint of its $0.05 - $0.20 guidance.
Coherent’s guidance for our second quarter of fiscal 2024 ending December 31, 2023 is Revenue of approximately $1.075 – 1.175 billion, which would represent a QoQ growth of 6.8% at the midpoint. Non-GAAP earnings per share are estimated at approximately $0.14 - 0.32, which would be a 43.8% QoQ growth at the midpoint.
A key sector for Coherent are Datacom Transceivers for AI in the Communications market segment of its Networking reporting segment. The company reported in its Shareholder Letter :
“Driven by AI-related data center builds, 800G Datacom transceiver backlog significantly increased from the already substantial level of the preceding quarter. Increased orders for 800G Datacom transceivers in the first quarter drove a more than a 200% increase in our 800G backlog for the first quarter of fiscal 2024, enhancing the depth and breadth of our AI- related 800G Datacom business.”
Chart 1 shows the Datacom Transceiver Market forecast. 200G and higher data-rate transceivers >65% of Coherent’s revenue, and 800G and higher data-rate transceivers > 50% of the total available market by 2027.
Chart 1
I analyzed Coherent’s achievements in AI and 800G in a June 26, 2023 Seeking Alpha article entitled Coherent: Benefiting From Migration To Ethernet Switching Attached To AI/ML.
But because of Coherent’s announcement of splitting off its Silicon Carbide (“SiC”) business, the focus of this article will be on SiC.
Introduction
Companies in the EV (electric vehicle) supply chain have been hit hard following recent 3Q earnings calls on concerns of a recent slowdown. Arguably the front man in the EV business, Tesla ( TSLA ).
There is a strong synergy between the health of the EV market and SiC chips. Silicon Carbide is known for its higher efficiency at the higher voltages commonly used in EVs. Consequently, SiC components are becoming more prevalent in the traction inverters and DC-to-DC inverters utilized in EVs. Chip manufacturers have noted that this increased efficiency results in lower weight, reduced battery wear, and extended driving ranges for EVs that incorporate SiC technology.
Stocks in the EV sector experienced a decline following Tesla's Q3 earnings report , which revealed a decrease in margins both sequentially and year-over-year. Tesla, a major player in the electric vehicle industry, is also continuing its aggressive pursuit of market share, potentially impacting the average selling prices for EVs in the near future.
In Q3, Tesla reported production of 430,488 vehicles and deliveries of 435,059 vehicles. The company cited a sequential decrease in production volumes, which was attributed to planned downtimes for factory upgrades. Notably, Tesla maintains its full-year delivery target of 1.8 million vehicles.
Despite surpassing consensus expectations for its Q3 earnings, SiC chip manufacturer ON Semi ( ON ) stock experienced a significant drop of approximately 14% due to a disappointing outlook for Q4. The company reported pushouts of $200 million in SiC chips from the slowdown.
In a clear example of how the Street works (or maybe doesn’t work) in my opinion, Wolfspeed ( WOLF ) stock shot up 22% after its fiscal 1Q 2024 earnings call by reporting:
- EPS of minus $0.99, which beat the consensus by $0.19
- Revenue of $197.4 Million, which was $0.35 Million lower than the estimate.
Coherent's SiC
Coherent stands out as one of the global few companies boasting full vertical integration in SiC manufacturing. Our capabilities span from SiC wafers and epitaxy to power devices and modules, providing a comprehensive production process.
Coherent has been making substantial investments in capital and research and development (R&D) for SiC over the past two years. This investment is in line with its 10-year, $1 billion commitment that was initially announced in August 2021.
As I noted in my December 12, 2022 Seeking Alpha article entitled Coherent: Gaining Momentum In Silicon Carbide From Partnership With Infineon, COHR was able to secure a multi-year contract to supply Infineon with 150 mm silicon carbide substrates for power electronics on Aug. 23, 2022. Just a week earlier, Coherent announced that it closed an $100 million-plus contract to supply Dongguan Tianyu Semiconductor Technology Co., Ltd., with 150 mm silicon carbide substrates to be delivered beginning this quarter and through the end of calendar year 2023.
Coherent's silicon carbide business, which manufactures wafers for various industries, including electric vehicles, is set to receive a significant $1 billion investment from two Japanese automakers.
This investment places a valuation of approximately $4 billion on the silicon carbide unit. DENSO Corp. ( OTCPK:DNZOY ) and Mitsubishi Electric ( OTCPK:MIELY ) will each contribute $500 million, securing 12.5% stakes in the unit, while Coherent will maintain a 75% ownership share and continue to operate it as an independent subsidiary.
The primary objective of this deal is to enhance Coherent's available free cash flow, allowing it to execute its capital allocation priorities. The anticipated $1 billion investment will be directed toward funding the future capital expenditure needs of the business.
I had previously discussed the company’s debt among other topic following its merger in a June 2, 2023 Seeking Alpha article entitled “Coherent: Short-Term Macro Headwinds Have Been Outweighing Silicon Carbide Tailwinds.” Coherent paid down $19 million in debt in F Q1 2023.
According to Coherent’s press release :
“Under the terms of the transaction, DENSO and Mitsubishi Electric will each invest $500 million in exchange for a 12.5% non-controlling ownership interest in the Business, with Coherent owning the remaining 75%.”
Coherent expects to generate approximately $300 million in SiC business in FY 2024 ending June 30, 2024. Under the terms of the deal for the new SiC subsidiary, it has a $3.0 billion pre-money valuation and represents ~10x FY24E revenues.
The market potential for SiC as well as another wideband gap material Gallium Nitride (“GaN”) are shown in Chart 2. GaN will exhibit a CAGR (compound annual growth rate) of 53.2% between 2021 and 2026, ahead of SiC with a CAGR of 42.5%, according to The Information Network’s report entitled Global and China EV Batteries and Materials: Technology, Trends and Market Forecasts .
Chart 2
Chart 3 shows the significance of the EV market on SiC device market, making up 63% of MOSFET’s in 2025, according to The Information Network’s report Power Semiconductors: Markets, Materials and Technologies .
Chart 3
What is the Status of the EV Market?
Chart 4 shows Battery Electric Vehicles (BEV) unit sales by quarter between Q1 2022 and Q3 2023. Note the cyclical nature of sales, which increase QoQ throughout the year. Assuming 2023 growth continues this trend, we should expect stronger growth in Q4 than in Q3.
Chart 4
Chart 5 shows BEV sales by month between December 2022 and September 2023. Again, there is some cyclicality, with increased sales increasing in each month in each quarter, followed by a drop in the first month of the next quarter, and then another increase.
September unit shipments from China and Europe show a slowdown compared to August shipments. Increased financing costs resulting from the elevation of interest rates, aimed at combating persistently high inflation, often nearly negated the benefits of price reductions.
According to the International Monetary Fund :
“The world’s central banks have unleashed the steepest series of interest-rate increases in decades during their two-year drive to tame inflation—and they may not be done yet. Policymakers have raised rates by about 400 basis points on average in advanced economies since late 2021, and around 650 basis points in emerging market economies.”
Chart 5
In September, global EV battery installations saw a 20% YoY increase, totaling 64.9 GWh. The top three companies in this space maintained their rankings, with CATL leading (22.4 GWh of batteries, and a 35% market share), followed by BYD (12.4 GWh, up 63% YoY), and LG Energy Solution (9.3 GWh, down 12% YoY). It's worth noting that LG Energy Solution's EV battery installations surpassed BYD's at the end of the quarter, primarily due to a 5% YoY increase in BYD's EV sales volume and an 8% YoY decline in Tesla's EV sales volume. Meanwhile, Samsung SDI's EV battery installations reached 3.2 GWh, up 41% YoY, representing the highest growth among the world's top six battery manufacturers.
Lithium prices have tumbled 67% so far this year based on spot lithium carbonate prices. Prices of cobalt metal have slid 20% this year and more than halved since May last year.
Nevertheless, CATL, the world's leading EV battery manufacturer, reported a 10.7% increase in third-quarter profit, its weakest quarter in over a year, attributed to reduced demand and intense competition. In September, CATL's market share in China hit a low not seen in more than a year, highlighting challenges from smaller competitors and declining demand.
Through Q3 2023, total BEV sales were up 32.2%. This includes YoY growth of 53.9% for Europe, 50.2% for USA, but just 18.3% for China, as shown in Chart 6.
Chart 6
Investor Takeaway
As shown in Chart 3 above, 63% of the SiC output will go into automobiles, where it is widely used in electric vehicle powertrain systems, where it improves efficiency and extends the vehicle's range. SiC is also prevalent in the charging systems of electric vehicles, making fast charging more efficient by reducing heat generation. Moreover, SiC plays a role in electric power steering [EPS] systems, where its implementation bolsters both the efficiency and reliability of these systems.
In on-board chargers, SiC diodes are employed to enhance energy efficiency and decrease energy loss, contributing to the overall sustainability of electric and hybrid vehicles. The integration of SiC in motor drive systems further elevates performance, minimizes energy loss, and extends the lifespan of the vehicle's motor.
Regenerative braking systems, which recover and store energy during braking for later use, also utilize SiC diodes and power devices to improve overall vehicle efficiency. Additionally, SiC can be found in various sensors and electronic components throughout the vehicle, benefiting from its superior thermal and electrical properties. The widespread use of silicon carbide in automobiles underscores its pivotal role in advancing the efficiency and sustainability of modern transportation.
Since Coherent began investing in SiC over two decades ago, its product revenue has generated a 35% CAGR.
The near-term outlook for Coherent silicon carbide business is strong, with demand surpassing supply for SiC substrates and epitaxial wafers. Revenue growth in the SiC segment is presently limited by production capacity constraints. The company's long-term confidence in the SiC business and its overall prospects has been bolstered by strategic transactions resulting from a review process initiated in May 2023. These developments indicate a positive trajectory for Coherent's SiC business and the company as a whole.
I rate the company a Buy. Coherent’s strong position in AI-related Datacom 200+G transceivers and silicon carbide are two of the strongest growing sectors in the marketplace, overcoming exposure to cyclical markets.
For further details see:
Coherent: Strong SiC Growth In Robust Global EV Sector Despite U.S. Slump