Analyst’s Note
The rating for Infineon is set as Overweight. With a series of acquisitions and a tightening of it’s strategic focus, Infineon has positioned itself well to profit from growth and secular trends in it’s four main segments in the long term, though there may be significant short-term headwinds.
Company Overview
Business Description
Infineon Technologies AG (Infineon) is a leading global chipmaker that was spun off from German industrial conglomerate Siemens in 1999 and is headquartered in Neubiberg, Germany. The company specializes in the development, production, and distribution of advanced semiconductor solutions, complemented by related software and digital services. Infineon operates in four market segments.
Market Segments
Automotive (ATV)
Infineon’s largest and most strategically important segment, accounting for over half of the company revenue. The automotive segment delivers semiconductors for powertrains, safety systems, infotainment, and driver assistance technologies. These technologies are especially important in EVs but are common in modern gas powered cars too.
Green Industrial Power (GIP)
The industrial power segment focuses on the generation, transmission, and consumption of electrical energy. Infineon’s products in this segment serve industrial automation, renewable energy, and transportation infrastructure markets.
Power & Sensor Systems (PSS)
The power and sensor segment focuses on high-performance power management, and sensing solutions. It’s portfolio includes semiconductors for power conversion, smart homes, mobile devices, lighting, and consumer electronics.
Connected Secure Systems (CSS)
The connected secure systems segment serves markets requiring secure connectivity and data protection, such as, IoT, cybersecurity, payment systems, identification solutions, and smart cards.
Industry
The semiconductor industry is characterized by rapid innovation, cyclical demand, and high capital expenditure requirement. Key trends include the growth of EVs, increasing demand for energy efficient technologies, and the expansion of IoT devices.
Competitive Analysis
Infineon mainly derives a competitive advantage from the high quality of their products, which is partly ensured by having the majority of the value chain for its products in-house. For its automotive and industrial segments, quality tends to outweigh price for the majority of Infineon’s customers for two reasons. Firstly, the chips Infineon provides tend to make up a relatively small part of the total manufacturing cost of, for example a car, making a difference of less than a dollar in price banal for a car whose parts cost thousands. Secondly, the products in those segments tend to have a comparatively high lifespan, meaning that Infineon’s chips are expected to last decades not years.
Being a world leader in the automotive industry with essential know-how and manufacturing capabilities in-house gives Infineon an advantageous level of flexibility which makes Infineon an attractive partner for companies in industries where parts often need to be highly specialised.
Risk
Cyclicality
Infineon is dependent on the health of its end-markets, which are highly cyclical. Due to the large amounts of debt and goodwill Infineon has accumulated as a result of its geographic expansions and acquisitions of Cypress Semiconductor, shrinking margins due to cyclicality could put impede Infineon’s ability to pay off its debt. Due to the majority of Infineon’s value chain being in-house, Infineon has a relatively high fixed cost structure and would be unable to offload the cost of manufacturing capability outweighing demand. Furthermore, Infineon derives its competitive advantage from the high quality of its products, leading to a continued need for high R&D spending, even in times of low demand. The companies expansion into Asia help outweigh some of the cyclical risk with likely persistent economic turmoil in Europe but low demand in its main automotive segment and slower than expected adoption of EVs could spell trouble for Infineon.
Geopolitical
The semiconductor industry faces heightened risk due to geopolitical tensions between the US and China, centring around technological leadership, economic superiority, and national security. However, for now, this mostly affects US and Chinese companies that design and manufacture semiconductor technologies critical for AI and data processing. As a European company mostly focused on power semiconductors, automotive chips, and industrial solutions, Infineon is likely to be shielded from the most severe impacts of these geopolitical factors.
Investment Thesis
Bullish Factors
Infineon’s recent acquisitions, investments, and its overall structure position it well to profit from secular trends in its core segments. Especially increasing EV adoption and a growing reliance on sustainable energy sources are likely to benefit the company.
Infineon’s focus on quality is especially attractive to customers in the automotive and industrial segments where product life-spans are long and quality is more important than price. Furthermore, the increased energy efficiency made possible by Infineon’s chips has the potential to far outweigh the superior acquisition cost they bring.
Bearish Factors
Prolonged periods of economic downturn in Infineon’s key European markets may compress margins due do Infineon’s continued need for high R&D spending. This could potentially strain its capital structure, particularly given the debt load and goodwill accumulated following its acquisition of Cypress Semiconductor.
Geopolitical tensions could limit Infineon’s opportunities in Asian markets, where it has already invested a considerable amount of money in and where a significant portion of its revenue comes from.
Conclusion
With a strong position in its main segments that leave Infineon well positioned to benefit from secular trends, the company is likely to outperform competitors and increase profit. Infineon should be considered Overweight.
Disclaimer: This is not financial advice, but merely an exercise in equity analysis.