Shares of auto and industrial-focused chip companies NXP Semiconductors (NXPI 0.63%), Axcelis Technologies (ACLS +1.97%), and SiTime (SITM +3.35%) had a tough October, falling 13.8%, 21.8%, and 12.6%, respectively, on the month, according to data from S&P Global Market Intelligence.
These three companies operate in slightly different areas of the automotive and industrial chip markets. And while many other types of semiconductors entered a correction in mid-2022, the auto and industrial markets had remained resilient through 2023.
There was some thinking these end markets may be resilient to a downturn, given that new cars and industrial equipment will have growing content per unit each and every year. However, the correction in these names now appears to be arriving.
NASDAQ: NXPI
Key Data Points
Electric vehicles and industrial chips are finally rolling over
Coming out of the pandemic, new electric technologies were boosted by low interest rates, technology improvements, and supply chain snarls that caused many distributors and customers to double-order.
However, that is now reversing. During October, long-term interest rates continued rising, peaking toward the end of October. Also during the month, various companies within the electric vehicle (EV) and solar industries reported softening numbers. At the beginning of October, Tesla reported deliveries that underwhelmed analysts, despite large price cuts. Bookending that toward the end of the month, key auto chip supplier onsemi guided for a soft fourth quarter, seeming to confirm the slowdown in these end markets for semiconductors.
Higher rates tend to depress the sale of EVs, which are still mostly more expensive than internal combustion engines, despite recent price cuts. Higher rates also tend to hurt purchases that are financed, such as residential solar panels. And many companies reported China, which had been a growth engine for EVs and Internet of Things (IoT) industrial chips, is still very weak.
NXP is a chipmaker specializing in auto chips, which made up 52% of its revenue in 2022. Industrial/IoT chips contributed another 21%. Therefore, it fell on the news flow throughout the month.
Meanwhile, Axcelis makes semiconductor equipment for ion implanting, which is a major process used to produce specialty chips for automotive and industrial applications. While Axcelis just reported earnings that beat analyst expectations on Nov. 2, and also gave guidance for growth in the current quarter, that growth is slowing down. But since Axcelis had more than doubled at one point this year, it pulled back from a high valuation.
Finally, SiTime specializes in precision silicon timing devices in chip systems, and also gets nearly half its revenue from automotive and industrial end markets, with the rest spread across mobile and communications applications. The company is earlier in its growth cycle than the other two stocks, and saw revenue increase 28.1% last quarter. However, as a loss-making stock that trades at a lofty 15 times sales, it too saw a downturn in October as interest rates rose.
An opportunity?
Certainly, the Federal Reserve's interest rate hikes are starting to hit demand for big-ticket items, and that is filtering down even to secular growth markets such as EVs and industrial automation.
However, if one thinks electric vehicle sales will reaccelerate once inflation comes down, then this downturn may be a great opportunity to pick up related names for the long run.
NXP is probably the more defensive play here, as it trades at just 17 times trailing earnings, gushes cash flow, and pays a pretty good 2.3% dividend.
Meanwhile, SiTime is more of the high-growth play, as a smaller company with very rapid growth and high market share in the emerging silicon timing systems market.
Axcelis offers a nice balance of the two, as it has maintained growth in the ion implant market, and its stock has now fallen to a more palatable P/E ratio of just 18.3 times earnings.
The recent slowdown in the EV and industrial markets has been notable. The big unknown is if this is a cyclical dip on the way to higher growth, or if the market may not be as large as thought.
But with virtually all auto companies transitioning to EV models, as well as governments encouraging EV purchases and building out national charging networks, I would lean toward this period being a speed bump on the road to higher highs, rather than the start of something worse.
