Revving Up Profits: How Infineon Stock is Accelerating Growth in the Automotive Industry (OTCMKTS:IFNNF)

In our previous analysis of Infineon Technologies AG (OTCQX:IFNNY), we identified that Infineon’s Automotive segment includes four key product groups including power semiconductors, MCUs, sensors, and memory ICs. Power semiconductors contribute about half of the segment’s revenue, with the power semiconductor market representing 58% of the overall automotive semiconductor market. We believed Infineon’s strong presence in the MCU, sensor, and power semiconductor markets gives it a competitive advantage.

In this analysis, we covered the company again following its strong performance in FY2023 with a growth rate of 23.8% for the full year. Thus, we conducted an analysis of its key product segments by product types and end markets to identify its top segments and determine whether these top segments could continue to support its growth outlook.

Automotive Segments On Top

Based on its annual reports and investor presentations, we compiled and derived an estimate of the company’s segment revenue % breakdown by end markets including Automotive, Green Industrial Products, Power & Sensor Systems and Connected Secure Systems as well as its breakdown by product types (power semiconductors, embedded control & connectivity, RF & sensors and memory ICs) for each end market segment. Additionally, we compiled the 8-year average revenue growth and market forecast CAGR for each segment by product type and end markets.

Based on the chart above, Automotive (ATV) represents the largest end market segment of the company (50.6% of revenues) followed by Power & Sensor Systems (PSS). Within product types, Power Semiconductors are the majority of the company’s revenues (55%) followed by Embedded Control & Connectivity at 30% of revenues.

Based on a revenue contribution of above 10% of revenues, there are 5 key segments of the company which are Embedded Control & Connectivity (Automotive), Power Semiconductors (Automotive), Embedded Control & Connectivity (Connected Secure Systems), Power Semiconductors (Power & Sensor Systems), Power Semiconductors (Green Industrial Power).

Growth Rate %	Automotive (ATV)	Green Industrial Power (GIP)	Power & Sensor Systems (PSS)	Connected Secure Systems (CSS)
Power Semiconductors Revenue	Between 12.3% to 19.2%	10.8%	Between 10.5% to 12.3%	–
Embedded Control & Connectivity Revenue	More than 26.4%	–	Between 10.5% to 26.4%	21.4%
RF & Sensors Revenue	Between 6.3% to 19.2%	–	Between 6.3% to 10.5%	–
Memory ICs for Specific Applications Revenue	Between 16.7% to 19.2%	–	–	–

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Source: Company Data, Khaveen Investments

In the table above, we compiled the estimated growth rates for each segment based on both growth rates by product types and end markets for each.

Segment	Ranking
Embedded Control & Connectivity (Automotive)	1
Power Semiconductors (Automotive)	2
Embedded Control & Connectivity (Connected Secure Systems)	3
Power Semiconductors (Power & Sensor Systems)	4
Power Semiconductors (Green Industrial Power)	5

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Source: Khaveen Investments

We ranked the top 5 key segments by product types and end markets in the table above. In first place, we ranked Embedded Control & Connectivity (Automotive) as the top segment due to its high growth rate (More than 26.4%). Following that, we ranked Power Semiconductors (Automotive) second ahead of Embedded Control & Connectivity (Connected Secure Systems) despite its lower growth rate of between 12.3% to 19.2% compared to 21.4% due to the higher revenue contribution of Power Semiconductors (Automotive) to the company’s total revenues.

Outlook

Overall, we believe the top 2 segments of the company include Embedded Control & Connectivity and Power Semiconductors products which both are in its automotive end market segment due to the high growth of its Embedded Control & Connectivity segment and high revenue contribution of Power Semiconductors to its total revenues. Additionally, we believe these top segments highlight the company’s position in the automotive semicon market as the market leader with a 12.4% share in 2022. Furthermore, based on its latest earnings briefing, management highlighted the positive outlook for its automotive segment in 2024 with “low double-digit sales growth” with automotive content growth as a key growth driver despite limited incremental growth in automotive market vehicle production volume. Furthermore, another factor is the shift to SiC which grew by 65% for the company to EUR500 mln (3% of revenues). Below, we continue to examine its competitive edge in both key automotive segments and determine its growth sustainability.

Embedded Automotive Segment

In this point, we examined the company’s competitive edge in its Embedded Control & Connectivity for Automotive segment which includes its automotive MCUs.

Based on the chart of the company’s automotive MCU market share, Infineon has performed impressively over the past 5 years as its market share had increased by 13.6% from 9.1% in 2018 to 22.7% in 2022, overtaking NXP for second place and trailing behind market leader Renesas, though its market share had eroded over the period. To determine Infineon’s competitive edge for its impressive share gains, we updated our previous comparison of automotive MCU companies in terms of product performance and breadth.

Automotive MCUs	Max Frequency Performance (MHz)	Bit Size	Max RAM (mb)	Number of Products
Texas Instruments (TXN)	400	32	2	190
Renesas (OTCPK:RNECF)	400	32	5.12	23
NXP (NXPI)	400	32	2	35
Infineon	350	32	8.384	366
Microchip (MCHP)	300	32	0.64	221
Average	370	32	4	167

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Source: Company Data, Khaveen Investments

As seen, Infineon trails behind TI, Renesas and NXP in terms of the maximum frequency of its automotive MCUs but has the highest maximum flash memory capacity, thus does not point to a conclusive performance advantage for Infineon. However, Infineon is superior in terms of product breadth with the greatest number of automotive MCUs through its TRAVEO, AURIX and PSoC automotive product lines. This is despite NXP (17.4%) and Microchip (13.1%) having higher R&D spending intensity compared to Infineon (12.1%) based on Q3 2023 TTM. The company’s TRAVEO product line was contributed by the acquisition of Cypress in 2020 and accounted for 29.2% of its total automotive MCU products. Its number of MCU products is 1.6x higher than Microchip in second place.

Management highlighted that its strong design wins for automotive MCU design win had surpassed EUR19 bln. Besides that, the company also recently announced new product developments such as the expansion of its TRAVEO lineup that features a new graphics engine “for automotive graphics applications” as well as new MOTIX MCUs for automotive motor control. In terms of partnerships, the company announced the extension of its partnership with UMC for the production of 40nm MCUs, securing “additional long-term capacity”. Furthermore, it announced a partnership with Eatron for product development of its MCUs targeted at EV applications such as battery management systems (BMS).

Outlook

Overall, the company’s impressive growth in the Embedded Control & Connectivity for Automotive segment is attributed to its impressive performance in the automotive MCU market where its market share has increased in the past 5 years by 13.6%. We determined the company to have a product breadth advantage over competitors supported by its acquisition of Cypress which expanded its automotive MCU portfolio. We believe the company’s segment growth could be supported by product development such as the expansion of its MCU product portfolio with new products as well as partnerships for product development and securing long-term production capacity. However, competitors such as NXP and Microchip have higher R&D spending as % of revenue compared to Infineon which could indicate more aggressive competition going forward. Furthermore, management expects to double its automotive MCU revenue with a CAGR of 14.9%, 1.6x higher than the expected market growth. However, this is below its past performance where its average growth was 5.9x higher than the market.

In terms of microcontroller, maybe one more aspect. We clearly see double-digit growth from year-over-year here from ’23, ’24. So the success story of microcontrollers continues. – Jochen Hanebeck, Chief Executive Officer

Power Automotive Segment

Furthermore, we examined the company’s competitive edge in its Power Semiconductors for Automotive segment we determined as the second-best segment of the company.

In contrast to automotive MCUs, Infineon had already led the automotive power semiconductor market with the highest market share of 31.9% in 2022, 1.6x larger than second-placed STMicro. Additionally, the company had solidified its market leadership position as it gained share over the past 5 years, from 26.2% in 2018.

To determine Infineon’s competitive edge, we updated our previous comparison of power semiconductor companies in terms of product performance and breadth.

Company	Number of IGBT	Max Volts	Number of MOSFETs	Max Volts	Number of SiC Products	Max Volts
onsemi (ON)	540	1500	1431	200	106	1700
Infineon	2437	6500	2569	950	102	2000
Texas Instruments	–	–	223	100	–	–
Rohm (OTCPK:ROHCF)	56	1200	127	800	91	1700
STMicro (STM)	393	1350	391	1700	89	1700
Average	857	2638	948	750	91	1775

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Source: Company Data, Arrow Electronics, Khaveen Investments

As seen in the table above, the company has the broadest product portfolio of IGBTs and MOSFETs ahead of all competitors. For IGBTs, have the highest maximum volt rating but trail behind MOSFETs. Furthermore, within SiC power semiconductors, Infineon does not have the highest number of products but leads in product performance with the highest max volt rating. According to Yole Development, automotive accounted for 70% of the power SiC market, highlighting the significance of SiC in automotive applications.

Furthermore, Infineon highlighted strong design win momentum for its SiC products with several key automakers as seen in the chart above. Based on its recent earnings briefing, management highlighted its SiC revenue had grown 65% to EUR500 mln and highlighted its expansion plans underway in Malaysia. The company targets to reach EUR7 bln in revenues by 2030, a CAGR of 45.8%.

One clear bright spot is our silicon carbide business where we see unabated momentum from industrial as well as automotive customers. In our 2023 fiscal year, we grew our silicon carbide revenue as predicted, by 65% to a level of €500 million. In line with the unbroken strong demand we are seeing, we are significantly expanding our manufacturing capacities by building the world’s largest, most competitive 200-millimeter silicon carbide power fab in Kulim, Malaysia – Jochen Hanebeck, Chief Executive Officer

Outlook

Overall, we believe the company’s competitive advantage in the automotive power semiconductors market where it has a long-standing market leadership is attributed to its performance advantage factor in IGBTs and SiC power semiconductors. Moreover, we also believe its competitive advantage in SiC in terms of product performance could bode well for its growth outlook as the majority of the SiC market (70%) is contributed by the automotive end market. Furthermore, we believe the company’s design wins, including top automakers and capacity expansion further support its growth outlook. According to management from its latest earnings briefing, demand from its customers remains strong for its power semiconductor business and highlighted China “as the most important EV market” for the company which represented its largest geographic region segment with a share of total revenues of 28.6% in 2022.

Also for our smart power related business, including MOSFETs, we continue to see strong and unprecedented demand from customers around the world. – Jochen Hanebeck, Chief Executive Officer

Risk: Short-term Market Weakness

We believe one of the risks for the company could be the company facing market weakness as highlighted by management from its latest earnings briefing across automotive, industrial and consumer end markets. However, according to WSTS, the semicon market is projected to stage a robust recovery with a 13.1% growth forecast in 2024, thus we believe the company’s weak market outlook is only short-term headwinds and could benefit from the market recovery through 2024.

We are seeing a similarly healthy demand picture for renewable energy applications as well as for power and charging infrastructure, supported by governmental decarbonization initiatives. E-mobility, our automotive MCUs and renewable energies are in stark contrast to the still very sluggish Consumer, Compute, Communications IoT areas of our business. In these areas, consumers and also companies are holding back on spending in a still inflationary, uncertain, volatile environment. – Jochen Hanebeck, Chief Executive Officer

Verdict

As seen above, we updated our valuation, with a weighted average revenue growth projection of 16.15% and 5-year average forward growth of 10.9%, a discount rate of 12.8% (company’s WACC) and EV/EBITDA based on the company’s 5-year average of 12.13x, obtaining an upside of 31.3%.

Overall, we believe the company’s key strengths lie in its Embedded Control & Connectivity and Power Semiconductors segments within the automotive market. The significant growth in the Embedded Control & Connectivity segment, coupled with the substantial revenue contribution from Power Semiconductors, positions the company as a leader in the automotive semiconductor market, boasting a 12.4% market share in 2022.

We believe the company’s remarkable performance in the automotive MCU market, with a 13.6% increase in market share over the past 5 years, underscores its competitive edge. This success is attributed to its extensive range of automotive MCU products. Looking ahead, we anticipate sustained growth in the automotive MCU segment through product portfolio expansion, strategic partnerships, and securing long-term production capacity, with management aiming to double revenue at a CAGR of 14.9%, surpassing expected market growth. In the Power Semiconductors segment, we believe the company’s strength lies in product breadth and superior performance in SiC technology. Given that 70% of the SiC market is attributed to the automotive end market, the company’s competitive advantage in this area is crucial. Additionally, design wins with top automakers and capacity expansion further enhance its growth prospects in the Power Semiconductors segment. Based on our updated DCF, we rate the company as a Buy with a target price of $54.88 which is fairly in line with our previous forecast of $54.79 with a slightly higher 5-year forward average growth rate of 10.9% compared to 9.8%.

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