2 EV Chip Stocks Down 34% and 45% That Could Become Hidden Artificial Intelligence (AI) Plays

The electric vehicle market experienced a major slowdown last year, and with it, chipmakers specializing in power semiconductors essential to electric vehicles.

But some interesting comments from two key EV chip makers this earnings season offer hope not just for an EV recovery, but that new energy-efficient chip technologies could be increasingly adopted in power-hungry AI data centers.

With the next two stocks down 34% and 45% below their highs and trading at low earnings multiples, a rally in electric vehicles could send their stocks higher, and new demand for AI could add fuel to the fire.

Axcelis and On are known for silicon carbide

On Semiconductor (ON 1.66%) and Axcelis Technologies (ACLS 0.98%) are at the forefront of silicon carbide technology, which should be a high growth market for years to come.

Of note, silicon carbide is a type of infused silicon that has higher conductivity, heat dissipation, and strength under extreme conditions than traditional silicon. It is therefore believed to be necessary in applications where high temperatures and efficiency are crucial, such as electric vehicles. However, silicon carbide is a difficult material to work with, which is why it hasn’t found its way into all mainstream devices.

Axcelis is a major supplier of ion implant devices, or machines that infuse silicon with ions from another atom, changing the silicon’s properties. Its machines are already used in the production of power devices, but SiC is probably Axcelis’ biggest growth market. In addition, Axcelis’ devices are also used in memory production, albeit in smaller quantities.

On Semiconductor uses Axcelis machines to produce SiC power chips themselves. While there are about half a dozen world leaders chasing silicon carbide dominance, On appears to have an early lead in the technology. The company already has 35% to 40% market share and is growing at twice the rate of the overall SiC market.

Despite their leadership in this long-term growth area, both stocks have been hurt by the current downturn in the electric vehicle market, which has delayed investment in the supply chain. However, even in the EV bear market, both companies are still very profitable. On maintained an operating margin of 22.4% last quarter and made $338 million in net income, while Axcelis had an operating margin of 20.5% and made $51 million dollars in what could be the low quarters of this recession.

This level of profitability, even in a recession, has allowed each company to reduce its share count through share buybacks. These buybacks look like a smart move, with On trading at just 17.4x earnings and Axcelis trading at just 15.1x earnings, with current earnings levels close to bottoming out.

Image source: Getty Images.

But power-hungry AI data centers may start using silicon carbide

As of today, the electric vehicle and electric industrial markets dominate revenue for both Axcelis and On. However, each has a tantalizing new opportunity in AI data centers.

AI-powered requests require 10 times the power of a typical search request, and AI data centers should accelerate electricity demand for the rest of the decade, after a decade in which US energy demand has not grown at all. Conformable Goldman Sachs (GS -0.12%)data centers will go from 3% of US energy consumption to 8% by 2030.

In June, On unveiled a silicon carbide product designed specifically for AI data centers to help manage data center power more efficiently. Power is converted four different times between the power grid and the AI ​​processors in the data centers, and those conversions cause 12% energy leakage on average.

However, according to On, replacing traditional silicon power converters with its new EliteSiC 650V solution can reduce this power loss by 1%. 1% might not sound like much, but when you’re talking about the sheer amount of power and scale for AI data centers, it adds up to a lot. If this 1% reduction in energy losses were extrapolated to all data centers globally, it could save enough electricity to power a million homes for a year.

While that represents a small portion of revenue today, at its recent analyst day, On is forecasting 22% average growth in its data center business over the next five years.

Meanwhile, Axcelis management also hinted at the new On product in its own earnings call. CEO Rusell Low noted that “we have seen customers announce new silicon carbide trench MOSFET products targeting AI data centers, which represents an attractive opportunity for Axcelis given the high implant current associated with ditch technology”.

AI is not included in the price

The AI ​​opportunity in On and Axcelis doesn’t appear to be undervalued, given that their stocks have fallen even as AI-centric stocks have taken off this year. That’s because the market for electric vehicles is in decline.

But with interest rates set to drop, helping car buyers, and EV technology improving every year, this market may be about to change. And if data centers start using silicon carbide more often as their power needs grow, that could add another upside to the recovery. All in all, these two companies look like cheap ways to play both electrification and AI trends.