CS shares race ahead

Stocks in the CS industry soar to well above pre-pandemic levels

BY RICHARD STEVENSON

While the pandemic has taken its toll on all of us, it’s been hardest on the poor. Those with bigger salaries are less likely to have lost their jobs, and if they’ve had a chance to invest any spare cash, they are probably enjoying a good return.

Canny investors will have considerably strengthened their financial position over the last year or so by buying shares in technology companies. As a glance at our annual Shareprice Leaderboard shows, over the 12 months up to the end of April 2020 the tech-heavy NASDAQ climbed by just over 60 percent, while some companies in our industry have fared even better (see Shareprice Leaderboard). Topping our list is Cree, thanks to a valuation that has leapt more than three-fold. Substrate AXT is not far behind, and even third-placed II-VI has delivered a return over this timeframe of around 140 percent.

It’s worth noting that all these impressive performances are not a simply a result of nosedives at the start of the pandemic followed by recoveries throughout last summer to regain the lost ground. Compare the share prices at the very beginning of last year to where they are at the end of April 2021, and you’ll see that all but one of the companies we cover are enjoying an increase in valuation, with five doubling their worth over that timeframe (see the second Shareprice Leaderboard, which considers the period from the beginning of 2020 to late April of this year).

Share Price Leaderboard.pdf> It’s been a great 12 months for Compound Semiconductor stocks, with a rise in valuation across the board.
Champion Cree
Cree’s soaring share price reflects the success it has had in transforming its business. It has now sold-off its LED chips and lighting businesses, which brought declining returns over the last decade or so, and has turned its attention to making SiC substrates, SiC power devices and GaN-on-SiC RF products. Marketed through the moniker Wolfspeed, sales of these products are ramping, and could continue to do so throughout this next decade and beyond as the company executes a massive capacity expansion program to produce higher volumes more efficiently.

The company still has a long way to go along this road. Sales of its revamped portfolio are growing, with revenue for the third fiscal quarter of 2021, ending on 28 March, netting $137.3 million. This is above guidance, an 8 percent increase sequentially, and up 21 percent comparted with the equivalent fiscal quarter of the previous year. However, due to a combination of Covid-19 safety measures and a temporary increase in higher factory costs, gross margins are heading in the wrong direction, having fallen 0.4 percent sequentially, to 35 percent. This will have contributed to the loss for the latest fiscal quarter, which is $24.7 million, according to non-GAAP accounting.

All figures should improve substantially over the coming years. Gross margin is tipped to climb towards 50 percent, thanks to the launch of the 200 mm Mohawk Valley Fab that will swell shipments. Construction of this fab accounts for much of the $550 million that Cree is investing in capital expansion in fiscal 2021. Helping to pay for this is the sale of the LED business that recently netted around $500 million.

During a third fiscal quarter earnings conference call, held on 28 April 2021, Cree’s CEO Gregg Lowe offered some insight into the latest trends in the markets where the company’s products serve. “We are seeing more demand in our core automotive and RF markets, as well as additional interest in new areas across energy, industrials, and aerospace and defence,” revealed Lowe. Diversity of deployment is impressive, including devices designed into forklifts, 3D laser printers, air conditioners, motor drives, robotic arms, flying vehicles and a beer truck.

Lowe added that the company’s device pipeline now stands at more than $10 billion, with new opportunities being identified at a rapid pace. In just the last quarter, the company’s sales team secured more than $580 million in design-ins; and over the last five quarters this figure totals $2.5 billion.

Over the next few years, Cree isset to benefit from the $2 trillion infrastructure plan recently unveiled by the US administration. Within the plan, $100 billion is dedicated to increasing broadband access, with a special emphasis on 5G infrastructure. Remarking on this, Lowe commented: “This development, combined with strong sales of 5G smartphones during the pandemic, underscores how 5G is continuing to gain momentum and offers a global opportunity in the years ahead.”

Also included in the infrastructure plan is significant funding for electric vehicles, including sales rebates, tax credits and charging stations. “We anticipate this will have a significant impact on the adoption of electric vehicles,” reasoned Lowe. “We are now seeing US automakers make big commitments to ramp their EV efforts. For instance, General Motors and LG Chem recently announced plans to invest $2.3 billion to build a battery cell plant to support the automaker's efforts to expand its electric vehicles.”

Cree could also benefit from a ramp in electric vehicle production in Europe. On a recent trip to Germany, Lowe had very positive conversations with a number of tier one carmakers, who are struggling with supply constraints associated with silicon chips. He offered them hope, telling them that Cree is going into production with the world's largest SiC fab, right in the middle of this supply issue. This great timing, which Lowe openly admits is more down to luck than judgement, bodes well for Cree’s future. “[It] is certainly a very nice light at the end of the tunnel for some of these guys as they start placing bets on silicon carbide.”

Until the Mohawk fab is up and running, sales are likely to show a moderate increase, rather than a massive ramp. During the next quarter sales are tipped to rise to between $142 million and $148 million, with the majority of the increase in revenue coming from the power and RF device product lines. A small uptick is also anticipated from the materials division.

Construction of Cree’s Mohawk Valley facility is well underway. This fab is the centrepiece to Cree’s massive expansion plans.

AXT accelerates
Throughout most of last year, AXT’s share price hovered at around $5, before leaping to almost twice that in November, and surging as high as just over $15 in late February. The company’s valuation has dropped back a little since then, but sales continue to climb. They leapt from $22.1 million for the second fiscal quarter of 2020 that ended on 30 June to $25.5 million and $27.0 million in the third and fourth fiscal quarters that followed, and have broken the $30 million barrier in the most recent quarter. This growth is attributed to an increase in sales to chipmakers serving a broad range of markets, from 5G telecommunications and its related technologies to datacentre connectivity, LED-based sensing and display, healthcare monitoring and consumer devices.

Of the $31.4 million netted in the most recent quarter, $23.4 million came from substrate sales and $8 million from the two joint-ventures: BoYu, a manufacturer high-temperature crucibles and tools for OLEDs; and JinMei, a diversified industrial supplier of high-purity materials.

As well as growing its revenues, AXT is reducing its reliance on its biggest customers. Company CFO Gary Fisher highlighted this welcome move in a call discussing earnings on 28 April, 2021, when he revealed that no customers accounted for 10 percent or more of overall revenue, and the top five contributed just 26 percent to total sales. “Usually, we do have at least one 10 percent customer,” added Fisher. “And usually, the top five customers contribute approximately 35 percent to 40 percent of total revenue.”

Gross margin is on the rise, reaching 36.8 percent in the latest fiscal quarter, up 2.9 percent sequentially and 10.2 percent year-on-year. Thanks to this, plus a favourable product mix and and increasing sales, net profit hit £3.4 million, up $1.3 million sequentially.

During a recent earnings call, AXT CEO Morris Chang discussed sales for all three types of substrate produced: InP, GaAs and germanium.

Shipments of InP are seeing strong growth. “We saw continued strength from 5G and its related technologies,” said Chang, who did not know whether these wafers were for optical connections for 5G equipment, or technologies such as passive optical networks that support 4G and 5G functionality. “But from our perspective, any modernization of telecom infrastructure that utilizes indium phosphide is positive for our business.”

Demand for GaAs substrates has recently increased, due to sales to the makers of LEDs and wireless products. For this class of substrate, revenue for the first fiscal quarter 2021 exceeded all quarters since the first fiscal quarter 2018. Sales in the coming quarter will be helped by strong demand by LED makers, but hindered by a softening of sales to those making wireless products.

AXT is continuing to invest in both its InP and GaAs technology. It is developing 6-inch InP substrates and has just unveiled 8-inch GaAs substrates for LED applications. Commenting on the latter, Chang remarked: “This is no longer a test tube laboratory program, because we are now shipping wafers according to our customer specifications. This is a tremendous step for AXT, and we are very proud of our team.” It is hoped that the large substrate size will help to provide scale and efficiency for very high volume manufacture of VCSELs for 3D sensors and LiDAR, and microLEDs for displays.”

For germanium substrates, revenue for the recent fiscal quarter is down slightly. However, growth is expected this year, thanks to a strong satellite market. This should provide a modest increase in the next quarter.

For that quarter – the second fiscal quarter of this 2021 – AXT predicts that contributions from germanium, plus growth in InP and GaAs revenues, will propel sales to between $30.5 million and $31.5 million. Profit is expected to be in the range $2.6 million to $3.4 million.

Third for II-VI
II-VI, third on our Leaderboard, has seen its share price follow the same trend as AXT: broadly flat to last November, climbing to peak in February, and now a little below that high point.

This multi-national powerhouse, with products that include GaAs electronic devices, SiC substrates, laser systems and components for optical networks, claimed several records in its last quarterly results, announced on 9 February, 2021. Quarterly sales broke new ground, hitting $787 million, backlog reached a record $1.08 billion, and cash from operations climbed to a new high of $221 million.

The management at II-VI are very pleased with the integration of Finisar into the existing business. Discussing this in a second fiscal quarter earnings call, held on 9 February 2021, company CEO Chuck Mattera revealed that progress on this front is ahead of schedule: “We are now on track to achieve our $150 million total synergy target in 24 months, or 12 months ahead of schedule. And we are now increasing our three-year total synergy target to $200 million.” This success is helping to strengthen margins and ensure a strong cash flow.

Details of particular product successes were highlighted in the call by Giovanni Barbarossa, who is Chief Strategy Officer and President of the Compound Semiconductor Segment.

Barbarossa revealed that products for 3D sensing increased more than 140 percent sequentially. “3D sensing growth came from shipments of production volumes of VCSEL arrays for multiple end customers, including for front-facing and world-facing applications, as well as for other consumer electronics, and automotive in cabin sensing,” said Barbarossa. According to him, sales of VCSEL arrays should continue to rise, as II-VI expands its customer base with additional wins, including in the Android ecosystem and personal computing platforms.

II-VI has devoted much time and effort to building up its 3D sensing products. Back in 2013 it bought Oclaro’s GaAs laser business; and three years on it purchased the Anadigics GaAs fab and the Epiworks facility; and in the autumn of 2019 it bought the Finisar fab.

“When we acquired Finisar some asked us which gallium arsenide fab we plan on closing,” remarked Barbarossa. “Our answer was none because we needed the capacity to gain share and become the market share leader, by offering breakthrough solutions at scale.”

As well as sensing, the VCSELs made by II-VI are targeting LIDAR. Barbarossa is confident of success in this sector, arguing that the company has the broadest portfolio of products in the industry. “Unlike our pure play laser competitors, we have an entire vertical integrated portfolio or both active and passive components, made from our engineering materials that are critical for these next generation LiDAR designs.”

SiC products for power electronics could also help to grow II-VI revenue. Encouraging signs on this front include one of II-VI’s purchasers of SiC substrates that has won selection by a tier-one automotive manufacturer in Japan.

Another promising portfolio of products are InP-based lasers. Shipments of high-data-rate coherent transceivers are on the rise, adding bandwidth to new and existing networks, and sales are up for 200G and 400G components. “We are also excited to announce that we have just sampled our first 800G transceivers to a large web-scale customer, who has already provided exciting feedback,” added Barbarossa.

II-VI is widening its broad portfolio with the acquisition of Coherent, a manufacturer of a broad range of lasers, including CO, CO2, excimer, solid-state and fibre sources. II-VI emerged victorious in a bidding war with MKS Instruments and Lumentum during the first few months of this year. The stock-and-cash deal, worth around $7 billion, is expected to close at the end of this year.

Results just in for the third fiscal quarter show that the company continues to thrive, generating a revenue of $783 million and a cash flow from operations of $447 million. For the fourth fiscal quarter, sales are expected to net $752-802 million, with earnings of $98-127 million.

II-VI has just expanded its SiC wafer finishing manufacturing footprint in China to serve the market for electric vehicles and for clean energy applications.

Languishing Lumentum
Footing this year’s table is laser diode manufacturer Lumentum. It’s not that Lumentum has performed poorly – it’s just that its peers have fared better. Over the timeframe considered in the annual Shareprice Leaderboard, Lumentum has seen a rise in its valuation by about 20 percent, and based on a pre-Covid reference point of the start of 2020, the increase in share price is around 17 percent.

Over the last year or so Lumentum’s share price has not fluctuated wildly. It’s nadir over that time has been just below $70, and it has peaked at a little more than $105.

Lumentum has been experiencing mixed fortunes. Sales of it VCSELs for 3D sensing applications having been strong, but shipments of telecom lasers have weakened, due to a push-out in 5G deployments.

There has also been a sharp decline in sales of commercial lasers, due to weakness within the industrial sector.

While the company’s management may also rue their failure to secure Coherent, market reaction to missing out on this deal has actually been favourable. When news broke in March that II-VI had finally won the bidding war, Lumentum’s valuation climbed by around 5 percent, probably spurred on by a boost to the company’s financial assets – it would now be in line for a termination fee, worth $218 million.
Very recently Lumentum has released its results for its third fiscal quarter of 2021, ending 31 March. Sales missed guidance, coming in at $420 million, down 12 percent sequentially and below the guidance given in February of $425 million to $440 million. This news didn't go down well with the market, with shares tumbling 15 percent.

Company CEO Alan Lowe accounted for unexpectedly low revenue in a quarterly earnings call given on 12 May. He blamed the sales shortfall on China’s roll out of 5G, which is going slower than anticipated, due to geopolitical tensions with the US and shortages of electronic components. Continued delays in 5G fronthaul deployments in China have dragged down third quarter revenue for directly modulated lasers to significantly below year-ago levels. There will be no immediate improvement, with sales of this class of laser for the upcoming quarter expected to be down by more than $20 million year-on-year.

“At this time, we expect 5G fronthaul deployments could resume this summer,” added Lowe. “This timing would drive increased demand for our products towards the middle of fiscal '22, once customers ramp up and burn through existing inventory.”

Another sector weakening in the short term is 3D sensing. Due to customer design decisions, the global market for 3D sensing lasers is expected to decline between 20 percent and 25 percent during Lumentum’s fiscal 2022. However, during that fiscal year, and the one that follows, laser-based sensing is expected to expand into more applications and markets. Lowe says that this will set the stage for reacceleration of market growth in fiscal 2023.

Although total sales are expected to be sluggish for the next few quarters – revenue for the first half of fiscal 2022 is expected to be down approximately 5 percent relative to the first half of fiscal 2021 – the company is very bullish about its longer-term prospects. Sales for this latest quarter were rich in new and differentiated products that enjoyed double-digit year-on-year growth, and can serve in markets with great prospects for expansion over many years. These products include InP coherent components and modules, next-generation contentionless ROADMs, high-speed electro-absorption modulated lasers and 3D sensing lasers.

Commenting on these opportunities, Lowe remarked: “The computer and machine vision revolutions are in their early days, and we expect 3D sensing and LiDAR capabilities will expand to many more applications in multiple markets.” In his view, there are opportunities in augmented and virtual reality, 3D machine vision for industrial applications, frictionless and contactless biometric security and access control, and automotive and delivery vehicle applications. Another sector with much promise is laser-based material processing, which Lowe says is critical to the manufacturing of the devices that enable the digital transformation and transition to 5G wireless, as well as the production of electric vehicles and technologies for energy storage.

With so many great opportunities ahead, it’s unlikely that Lumentum will languish at the bottom of our Leaderboard for too long. But with strong prospects in the next 12 months for all companies in the compound semiconductor sector, it will not be easy to climb rapidly up the table.


Comparing share prices of compound semiconductor companies to pre-Covid times shows that they have fared far better than just recovering from the nadir caused by the pandemic.