Truist Securities Managing Director William Stein joins Yahoo Finance Live to discuss the importance of electric vehicle-focused chipmakers.
– The transition to electric vehicles represents a unique opportunity for discontinuous innovation and architectural disruption in the automotive supply chain, writes our next guest. Joining us now is Truist Managing Director William Stein. William, good to see you here this morning. It seems like not a day goes by that some form of new EV car launch by some form of automaker doesn’t happen. This week, Lotus released a Hyper SUV, whatever it is. But what do… what do these releases mean for chipmakers? WILLIAM STEIN: Well, that’s a big potential change for chipmakers. There’s about twice the semiconductor content of a typical internal combustion engine — excuse me, in a typical electric vehicle compared to a traditional internal combustion engine. It’s a significant improvement, a bit of a change from the main providers, but a big increase in semi-content. – William, it’s Julie here. When you look at the rate of adoption and planning for electric vehicles versus what was expected, how is that tracking? And then the semiconductor manufacturers that serve the industry – are they tracking this adoption? WILLIAM STEIN: Yes. So penetration, in our view, is about 3% of global automotive production today. It is relatively modest. About a year ago, we were expecting, by 2040, maybe 40%, 50% penetration. But that has increased dramatically over the past year, mainly due to the two [AUDIO OUT] global government targets, but, perhaps even more than that, targets set by automakers. These have been integrated and accelerated, you know, in terms of what percentage of their fleet they intend to make electric and when they plan to achieve that. These two elements have been significantly integrated over the past year. We think the semiconductor companies are, you know, supporting this. There are ongoing shortages. I’m sure you’re well aware – that is, our – all of your viewers – that this has been a problem with the production. I don’t think it was limited or even too focused on the EV market. I think that’s been, you know, pretty big in the whole industry, you know, especially internal combustion cars. – William, Julie recently had very good discussions with NVIDIA CEO Jensen Huang. And he’s really gone a long way in what he plans to do in a lot of different areas of his own business, of course, one of them being self-driving. Is NVIDIA one of the big winners in chip supply and just gave EVs that push? WILLIAM STEIN: So NVIDIA has no significant position in the transition from internal combustion to electrification. The major semiconductor vendors that are enabling this transition, if you just isolate the propulsion mechanism, on the right, internal combustion to electricity — you’re talking about power semiconductor vendors, companies like Infineon, Cree , Wolfspeed, ON Semiconductor. They are the ones who have really… who are really participating in this movement on the propulsion side. Where NVIDIA plays or attempts to play is in this very long-term view when – or forgive me, when ADAS, or Advanced Driver Assistance Systems, becomes so advanced that it enables autonomous or near-autonomous driving autonomy. And it is in this area that NVIDIA plans to have a very significant position in the market. – So it looks like you think the electric vehicle opportunity is definitely faster than the autonomous vehicle opportunity. What about the relative size of these opportunities and their importance to the chip industry? WILLIAM STEIN: Yes. The– so these are very different opportunities. We’ve done a lot more work recently on the electrification part. We… you know, there are two think tanks around autonomous vehicles. One is this kind of lunar approach that many vendors and many suppliers and technology companies have been trying for a long time to say, you know, going from a regular car to a car that has all the technology to drive itself and I’m will get there in one step. There’s another approach, a very different approach, which is that certain technology companies – Mobileye, a division – now a division of Intel – have been sort of the most emblematic of this approach – are more incremental. In other words, we are going to provide technology to make the car a little safer and to avoid different types of potential accidents. We’re going to achieve that goal slightly better with each year and each model and each release of new technology. And eventually, we may get to a point where we have self-driving. This approach has proven to be the most prevalent among today’s OEMs, OEMs, automakers. They looked more into this approach. So we think it’s going to be a – even more of an incremental market over time. – You bring up an interesting point, William in a year notes that EVs – the chip companies most tied to this EV push are under-owned by ESG-related ETFs. What causes this? WILLIAM STEIN: Yes. You know, I don’t know specifically, do I? My guess is that managers of ESG-focused investors – ESG-focused funds likely inspect a wide variety of metrics and, perhaps, rely on metrics created by third parties that measure these companies in function of these three vectors – environmental, social, and governance. The point I was trying to make in the note you referenced is that these power semiconductor companies are really at the heart of the technology that is enabling this significant change in how we consume power. You know, the automobile represents a very large part of our daily energy consumption. It goes from gasoline to electricity. And I think someone who is involved in ESG investing would want to be exposed to this theme and the companies that are really at the heart of implementing it. We have therefore tried to assess what the weighting of these stocks is in the Russell 1000 and the Russell 3000, which tend to be the universe of stocks on which these ESG funds focus. And we compared the weighting of these stocks and ESG funds against the Russell. And what we found is that they are underweight, not overweight. We believe that over time this will likely change. It’s probably going to be a tailwind for these stocks, a kind of forced buy in these very environment-related stocks. – And William, finally, stepping away from that kind of ETF buying for a moment, you mentioned in passing that one of your top picks is on semiconductors related to this EV thesis. And I just wanted you to expand on that a bit more and why ON is particularly poised to benefit from this trend. WILLIAM STEIN: Yes. We – first of all, I think it’s fair to say that we’re pretty positive on that theme through the semi-finals. I don’t know if there are losers, per se. Some companies with high auto exposure may not benefit from the growth of the transition to electric vehicles. And there are smaller companies, like Monolithic Power and Diodes, which we think are sneaky ways to invest in this theme because we think they kind of have accelerated growth from this transition. But for companies like ON, they’re kind of…ON kind of sits in the middle. They have a lot of automotive content. But the company has vertically integrated capacitance into a special type of semiconductor called silicon carbide power switches. And they acquired a company called GTAT to develop the basic semiconductor material. It’s silicon carbide. And they are currently developing or improving their ability to develop complete semiconductor devices from these wafers. And we think this company had a very good ability or had a lot of success in getting design gains of these silicon carbide power modules from EV vendors. And we think that’s, you know, certainly partly understood by the street. But we think there’s more success to come than what the company has led so far. – Agreed. We will leave it there. Truist General Manager, Williams Stein, nice to see you this morning. Good weekend.