Investing in Gallium Nitride and Silicon Carbide
Write about technology for a while and you’ll be tempted to think you’ve heard about all the latest and greatest stuff. Prepare to be humbled. There’s just so much going on these days it’s impossible to keep up with it all. Not all technologies that sound great will be commercially successful and not all are worth learning about. Still, you don’t want to miss “the next Microsoft” as they say.
Since we provide all our insightful and well-researched content for free, nobody can complain if we “miss” some potentially disruptive technology. But, if you’re the CTO of a major tech company and you haven’t heard about Gallium Nitride (GaN), that’s probably not going to fly. The same holds true for Silicon Carbide (SiC), another material that’s only now plodding up Gartner’s slope of enlightenment.
Gallium Nitride (GaN) and Silicon Carbide (SiC)
We first came across the term “gallium nitride” when researching the new Space Fence by Lockheed Martin that can track objects in space the size of marbles. We hadn’t even noticed this term until just recently though it’s been around for a while now. Simply put, GaN is a material that has some superior properties which allow us to build better computer chips. That also happens to be what Silicon Carbide (SiC) is, a material that’s used in everything from graphene production to quantum physics applications.
You’re probably reading this article because you already know that and now you want to invest in these super materials that have actually been around for a while but are only recently making headlines in tech publications. GaN and SiC are gaining in popularity because the applications they’re used in are also plodding up the slope of enlightenment. In order to understand the possible investment opportunity here, we’re going to look at a company called Cree (CREE). Just over three years ago we published a piece on Investing in LED Stocks in which we briefly mentioned Cree as a play on LEDs and noted the stock’s lackluster returns. Three years later, we see a company that’s nearly doubled in size and presents an interesting opportunity to play two potentially disruptive semiconductor materials – GaN and SiC.
Cree’s Transformation Path
Getting your MBA not only increases your IQ by around 20% on average but it also teaches you how to make decisions with limited information. Otherwise known as the case study method, you’re often given limited information about a business and then asked what decisions should be made. Later on, you learn what actually happened, and realize you were dead wrong but it’s okay because bad decisions make for great stories. In the case of Cree, they’re undergoing a transformation of sorts around three areas of business: SiC and GaN stuff, lighting, and LEDs. The segment that relates to SiC and GaN is called Wolfspeed, and it came about in an interesting manner that is reminiscent of an MBA case study. It might even be one.
In 2017, the Wall Street Journal published an article which talked about a deal that fell through where German chip maker Infineon AG was planning to acquire Wolfspeed from Cree. Says the article:
Infineon had sought to buy the unit to boost its position as a supplier of power and radio-frequency solutions in the fields of electromobility and infrastructure connected to the so-called Internet of Things.
Zee Germans offered up $850 million for Wolfspeed and the deal fell through because of “national security concerns.” What happened afterwards is that Wolfspeed then decided to acquire Infineon’s RF business. An article on everythingRF talks about why Wolfspeed ponied up nearly $400 million for the acquisition which closed in March of 2018.
The acquisition of Infineon strengthens Wolfspeed’s leadership position in RF GaN-on-SiC technologies, as well as provides access to additional markets, customers and packaging expertise. This is a key element of Cree’s growth strategy and positions Wolfspeed to enable faster 4G networks and the revolutionary transition to 5G.
So far both companies have mentioned IoT and 5G as potential growth drivers for SiC and Gan but there are others as well – like electric vehicles. These combined growth drivers are expected to propel Cree’s Wolfspeed (WS) business from a small chunk to a very large chunk in the next five years.
Let’s take a close look at the growth drivers for SiC and GaN.
Cree’s Growth Drivers
Another thing you learn during your MBA is to estimate the potential growth for a business by looking at the total revenue that can be captured. This is called the Total Addressable Market (TAM). If you are developing a mushroom hunting app, the TAM would be the total number of mushroom hunters out there – a small number. That’s a lifestyle business, not a disruptive growth business that will produce the sort of returns a venture capitalist is looking for. In addition to TAM, there’s also Serviceable Addressable Market (SAM). Here’s a diagram that shows how TAM and SAM relate to one another. (Note that the words available and addressable are used interchangeably.)
SAM is when a company refines TAM to only include what they can realistically capture, and consequently, it’s supposed to be a more accurate number. Now before we look at some SAMs for Cree, it’s important to emphasize their current market leadership position. Being a leader means that you can then start to defend your position with a strong intellectual property portfolio and makes for a very compelling sales pitch in the C-suite. “No one ever got fired for choosing IBM,” as the old saying goes.
Here we can see three areas where Cree holds strong leadership positions; SiC Power, GaN RF, and SiC & GaN materials.
SiC Power, GaN RF, and SiC & GaN Materials
In each of these segments, there are opportunities relating to other disruptive technology themes like solar and electric vehicles.
Electric vehicles continue to make strides in adoption with increased range and faster charging. That ability to charge quicker – fast charging – is an opportunity for Cree, a company that builds components that allow for quicker charging along with other key components found in electric vehicles as seen below.
As for solar, silicon carbide enables lighter, smaller, quieter and more efficient solar inverters – 10 megawatts saved a year for each gigawatt installed. A 50KW inverter using silicon weighs 381 pounds while the same unit using SiC instead of silicon weighs just under 73 lbs.
Then there’s the $1.3 billion opportunity for GaN which includes drivers like “high performance defense systems” which would include applications such as space radar along with “an insatiable need for bandwidth” which describes the emergence of 5G technology which will use GaN for wider bandwidth, higher frequency, and higher efficiency. Outside of defense and telecom, Cree sees a plethora of other opportunities including the below.
Finally, there’s the SiC & GaN materials opportunity which has a SAM of $1.2 billion. All of this potential growth is why Cree is investing $1 billion in expanding their capacity.
Investing in Growth
The total SAM for Cree’s target markets represents $7.3 billion in potential revenues by 2022. Cree’s target is for Wolfspeed to hit around $850 million in revenues by 2022, a mere 11.6% of the total $7.3 billion opportunity. Capturing just 25% of that number would mean Cree’s Wolfspeed segment – a high margin business – would account for 55% of their revenues, making it a very attractive play on silicon carbide and gallium nitride for retail investors. In May of this year, Cree announced a $1 billion commitment towards scaling the business to capture all that SAM and simply tracking Wolfspeed’s revenues over time will show how well the strategy is working out.
Cree is shaping up to be a picks-and-shovels play on some key disruptive technology themes which makes it much more than just an “LED stock.” Having multiple growth drivers – solar, electric vehicles, EVs and EV charging, and 5G – means that revenue streams will be diversified and should be less volatile. Shares in Cree have more than doubled over the past two years, which means that investors are pricing some of this growth into the stock already. Tech stocks can be highly volatile, so if you’re thinking about opening a position then try to use Dollar Cost Averaging (DCA) instead of trying to time the market. As they teach you in business school, proceed with “cautious optimism”.