Strong sales of LED backlit screens and mobile devices have led to substantial gains in the share prices of many III-V chipmakers over the last year. Richard Stevenson reports.

The behavior of the stock market is out of kilter with that of the general economy. The politicians and heads-of-state keep telling us that there is recovery, but it is fragile, and it could be a bumpy ride. The behavior of the stock market, however, suggests that business of booming. This difference arises because the stock price is strongly influenced by expectations of future business. Investors clearly think that recovery is round the corner, and thanks to their optimism we have a bull market. The Dow Jones has climbed by 20 percent over the last financial year, and the FTSE has shot up by 25 percent.

Tech stocks have faired even better. The NASDAQ composite, for example, has gained nearly 45 percent over that time frame. But that is nothing compared to most of the III-V stocks – many of these have doubled in value, or done even better over that timeframe (see “The Compound Semiconductor Share Price Leaderboard”, p. 23, for the numbers).

At the top of the pack sits Veeco, a manufacturer of process equipment and metrology tools. Over the last year its share price has soared from just $7 to nearly $50 (see Figure 1), not far short of its highest value ever, just north of $65. But that record occurred in the heady days of 2001 when all tech stocks prices were incredibly high.

Veeco’s rocketing shares price is a reflection of its great success in the MOCVD tool market. Sales of these growth machines have rocketed as LED chipmakers have increased their capacity to meet the growing demand for LEDs for backlighting displays in netbooks, laptops and TVs. And according to Jed Dorsheimer, an equity analyst at Canaccord Adams, Veeco’s share price has also received a helping hand from investors that have now got to grips with the potential of the LED.

MOCVD tools are by far the biggest sellers in Veeco’s LED and Solar Process Equipment business unit, which has delivered a sequential increase in sales in every quarter of the last year. In Q1 2009, this division netted $22 million, and since then it risen to $31 million, $53 million, $98 million and most recently $111 million. Growing this business has held the key to reversing Veeco’s fortunes: In Q1 2009 the company made a loss over $22 million, but a year on this three month period produced a $26 million profit.

Orders have also mushroomed over that time frame, growing from $28 million to $212 million. The company expects to ship 75 tools this quarter, and by bringing extra capacity on line, it hopes shipments will hit 100 and 120 units in the next two quarters.

 



 

Many of Veeco’s LED customers are buying its K-465i multi-wafer tool, a product has helped the company to take market share away from its main rival, Aixton. Dorsheimer estimates that Veeco has increased market share from 28 percent to 35 percent over the last year, primarily due to sales growth in China and Korea. However, although Aixtron might be loosing ground to Veeco, it is still the dominant player in the market. It has enjoyed a tremendous hike in its orders that has spurred a tripling of its share price, a performance good enough for this company to grab third spot in the table.

Strong demand for MOCVD equipment allows Veeco and Aixtron to charge a high price for their tools, and ultimately generate healthy profits. However, such success can also have its downside for the incumbent players, with firms operating in related fields trying to muscle in and get their own slice of the pie. In this market the equipment maker Applied Materials is developing a GaN growth tool for LEDs, but Dorsheimer believes this development will not threaten Aixtron or Veeco. He describes Applied Materials effort as “missing this backlighting cycle”. But he expects the company to have an offering for the next wave of growth, solid state lighting.

In the most recent round of quarterly conference calls Veeco was bullish about its future business, while Aixtron was more cautious. The tentativeness of the German outfit reflects uncertainty surrounding orders in 2011.

Chipmakers in China are the exception, and if they continue to place orders, then substantial MOCVD tool sales could continue throughout next year. In China MOCVD purchases are aided by a 50 percent subsidy from the government, but that could change, depending on the country’s next five-year plan. If you take the optimistic view, orders could keep coming at a good pace and help to maintain high MOCVD sales that will get a further boost due to a new wave of capital expansion when the LED lighting market takes off. Taking all these possibilities into account, Dorsheimer revised his target price after Veeco’s latest earning release to $62.

AXT’s revival

Nestled between Veeco and Aixtron in the stock leader board is AXT. This GaAs, InP and germanium substrate producer has had a topsy-turvy couple of years. Wind the clock back 12 months and the company was in last place on the leader board, but its incredibly strong performance since then has nearly brought its share price back to where it was in 2008 (see Figure 2).

This turnaround is partly due to the booming LED market, coupled to resurgence in handset sales. These factors have helped to lift AXT’s quarterly revenue from $7.7 million for the first three months of 2009 to $18.6 million in the same period of this year.

There have also been changes at the top - last March founder Morris Young replaced Phil Yin as CEO. Dave Kang from the research, trading and investment-banking firm B. Riley says that change has brought about a different approach in dealing with investors, with Young keeping a far lower profile than his predecessor. Yin has certainly being through many ups and downs with the company. Back in 2000 AXT had a 45 percent share of the GaAs substrate market, but this plummeted to just 5 percent in 2004. Market share has climbed since then: It is now 25 percent, and the company is targeting 30-35 percent by 2012.

AXT’s GaAs substrate sales figures are far greater than those associated with germanium, which netted $1.64 million in the last quarter. However, germanium sales could flourish if the terrestrial, concentrating photovoltaic (CPV) business takes off.

“AXT had a pretty significant opportunity in 2007, but the credit crisis pretty much wiped out all their customers,” says Kang. However, he says that the cost associated with CPV is falling, and if this trend continues it can offer cheaper electricity generation than that based on silicon and thin-film cells. “Over the next year your going to hear more about terrestrial opportunities, and that will drive [AXT’s] valuation.”

The current share price, however, reflects the RFIC and LED markets. Kang expects AXT’s valuation to continue to rise, and after listening to the recent quarterly conference call on 28 April he raised the target price from $4.90 to $7.20.

Footing the table

Every III-V company has seen improvement in its share price over the last 12 months, but the gains of some have been far more modest than those of others. Propping up the leader board are Emcore and Infinera, two companies that many analysts are only willing to talk about in private.

Like AXT, Emcore has suffered from the failure of the CPV market to take off over the last few years. During 2008 and 2009 the Albuquerque-based firm issued a raft of press releases claiming substantial orders for its triplejunction cells from firms across the globe, but in many cases these bookings never translated into sales. In the most recent set of quarterly results photovoltaic revenue was worth just $16.8 million, a $0.4 million sequential rise. But this gain resulted from a 14 percent increase in satellite business; CPV sales were down compared to the previous quarter. It’s fiber optic division brought in the remainder of its $42.4 million sales, and during those three months the company bled $11.9 million.

Infinera is also running at a loss, but this is getting smaller and the company is steadily increasing both sales and market share. Over the last year this producer of InP chips that its uses internally to build systems for fiber optic networks has steadily grown its quarterly sales from $68.9 million in the quarter ending 27 June 2009, to $83.9 million, $90.2 million and most recently $95.8 million. Losses have come down in that period, falling from $27.1 million to $7 million per quarter. There is good reason to believe that this transformation will continue. Within the telecom market there has already been an increase in sales within the enterprise market, and the system vendors, such as Infineon, are now tipped for growth. If this happens the company could soon realize annual sales of $500 million and a return to profitability.

Future success demands investment in new technologies and products, and Infinera has certainly been doing this, with R&D expense chewing up over $100 million in last four quarters. This investment has led to the fabrication of 40 Gbit/s chips that have now been passed to the systems division, and a product that could undercut rival technologies operating at this speed could be out before the end of the year. Looking further ahead, the company is developing optical switching technology that could pay dividends in the 2011-2012 timeframe.

Changes at the helm may also spur a return to profitability. Former CEO Jagdeep Singh is a tech visionary and entrepreneur with great experience in getting a start-up off of the ground, but his successor, Tom Fallen, is probably better equipped for managing operations and driving up revenues.

If Fallon executes on these fronts, Infinera could shoot up the leader board over the next 12 months. As AXT has shown, it possible to go from propping up the table one year to occupying one of the top spots the next. Tune in next year to see how Infineon and AXT fare, alongside many other players in the III-V market.

Disclaimer. Richard Stevenson holds a small number of IQE shares.