Cars Are Getting Smarter. This German Chip Maker Is Poised to Gain.
German chip maker Infineon Technologies should be benefiting from booming demand for its technology, as global economies bounce back from Covid-19 restrictions.
The Munich-based semiconductor giant (ticker: IFX.Germany) designs, manufactures, tests, and sells the brains that control computers used in autos, industrial machines, and consumer electronics.
But in February, a severe winter storm and resulting regional power outage forced a key manufacturing facility in Austin, Texas, to temporarily shut. Then, in June, an outbreak of coronavirus shuttered portions of a plant in Malaysia.
The company said that lost volume wouldn’t be made up until 2022. Infineon shares lost more than 15% of their value between February and July, but have bounced back, rising 5% in the past month to a recent 37.95 euros ($44.17). The stock is up about 21% this year.
The business fundamentals are still good, and the stock now could offer a buying opportunity. The number of products that use semiconductors will continue to increase by at least 6% to 8% annually over the next few years, predicts Berenberg analyst Tammy Qiu.
There is increasing demand for safer cars with advanced driving features that use sophisticated semiconductors. Infineon is well-placed to benefit from this trend, as the automotive sector contributed 41% of its annual revenue in 2020.
Infineon also is likely to benefit from increased demand in China, where it is market leader for certain types of chips. Its technology is more advanced than local chip makers’, so it is able to charge a 30% to 50% price premium, says Qiu.
“China has always been a big revenue contributor for Infineon, at about 30% of total revenue over the past three years,” Qiu writes in a client note. “Infineon has an unchallengeable competitive position in the country.” She has a Buy rating on the stock, which she estimates could rise 30%, to €48.
Stephane Houri, an analyst at French financial services group Oddo BHF, has a €48 target on Infineon, and says “the momentum is good. The group is well positioned to capture structural growth in its various markets.”
The business has a market value of €47 billion, fetches 25.7 times this year’s expected earnings, and is valued in line with its peers. For the year through September 2020, Infineon posted net income of €368 million on €8.6 billion in revenue, down from €870 million on €8 billion the previous year.
Deutsche Bank analyst Johannes Schaller estimates that revenue for fiscal 2022 could reach €13 billion, up from his current estimate of €12.6 billion.
For 2021’s third quarter through June—the company’s latest reporting period—net income was €496 million on revenue of €2.7 billion. Infineon said that it expects revenue of about €11 billion for fiscal 2021, which ends on Sept. 30. Annual results are to be released next month.
“Infineon is uniquely positioned to shape the two megatrends of today—electrification and digitalization. Both will not happen without semiconductors,” Infineon Chief Financial Officer Sven Schneider tells Barron’s. “Our company is set to continue its profitable growth journey into and beyond this decade, creating sustainable value for all stakeholders.”
If the impact of the two factory shutdowns were removed from the latest quarterly results, Metzler Capital Markets calculates that revenue would have risen about 30%, year over year, while operating margins would have been close to 19%—easily above expectations.
It looks as if the German chip maker is plugged nicely into growth from China and smarter cars.