Company Reports

Soitec manufactures silicon-on-insulator, or SOI, and other engineered wafers for the semiconductor industry. It buys plain silicon wafers and reengineers them, adding layers of materials to improve efficiency and reduce power consumption. Foundries like Samsung or GlobalFoundries use SOI as it allows them to produce more-efficient chips without the need for investing in smaller node sizes, hence saving money and reducing capital intensity. SOI is especially suitable for mobile, radiofrequency, and automotive applications.

Narrow-moat Soitec reported a 12% organic sales decline in its third fiscal quarter of the year as it continues to be dragged by its mobile segment, as expected. The smartphone market is still absorbing excess inventories, and inventory level has not improved as quickly as management anticipated earlier in the year. In turn, management lowered guidance on revenue for 2024 down to around a 10% year-on-year loss from a mid-single-digit loss previously. Management also lowered EBITDA margin guidance to 34% from 35% and now expects the firm to reach $2.1 billion in revenue in fiscal year 2027 versus 2026. We are not surprised by the downward revisions as management had already suggested this could happen. Management’s guidance looked too optimistic to us, and we model revenue will only reach Soitec’s medium-term guidance of $2.1 billion in 2028, compared with management’s initial forecast of 2026, which now has been pushed to 2027. Our long-term adjusted EBITDA margin remains at 37.5%, compared with management’s target of 40%. We are maintaining our EUR 180 fair value estimate.

We were not surprised by narrow-moat Soitec’s downward revision of its annual guidance as we had previously indicated its revenue outlook for fiscal 2024 seemed slightly optimistic. Management now expects total revenue to be down by mid-single-digits organically, compared with the previous estimate of flat growth. The outlook reduction mainly comes from the smartphone market, which is taking longer to recover than management had expected. In any case, we expect a healthy rebound in smartphone sales in fiscal 2025 due to volume recovery and more silicon-on-insulator content per device. We are trimming our fair value estimate to EUR 180 from EUR 190 after lowering our medium-term assumptions over the uncertainty of Soitec’s ability to reach its medium-term guidance. Shares remain slightly undervalued.

Soitec manufactures silicon-on-insulator, or SOI, and other engineered wafers for the semiconductor industry. Soitec buys plain silicon wafers and re-engineers them, adding layers of materials to improve efficiency and reduce power consumption. Foundries like Samsung or GlobalFoundries use SOI as it allows them to produce more efficient chips without the need for investing in smaller node sizes, hence saving money and reducing capital intensity. SOI is especially suitable for mobile, radiofrequency, and automotive applications.

Narrow-moat Soitec reported a 24% organic sales decline in its first fiscal quarter of the year mainly dragged by its mobile segment, as expected. Although the smartphone market is still absorbing excess inventories, the overall inventory level seems to be getting healthier as the year progresses. Last week, TSMC saw mobile revenue decline 9% year over year, a significant improvement to the 27% decline reported in the first quarter. However, TSMC also downgraded its full-year guidance to around a 10% sales decline compared with a mid-single-digit decline previously, on the back of a slower recovery for smartphones and IT spending. Given TSMC’s comments, Soitec’s guidance of flat sales growth for full fiscal year 2024 supported by a strong recovery of mobile revenue in the second half of the year might seem slightly optimistic. However, Soitec’s exposure to volume changes in the smartphone market is offset by the upward trend toward higher semiconductor content per smartphone, and some of Soitec’s technologies (FD-SOI and POI) have grown nicely during the second quarter in the smartphone market. Also, Soitec’s fiscal year ends in March, so its next full-year results will include three months of 2024, where the smartphone market might have recovered more. We therefore believe Soitec’s full-year revenue guidance is still achievable. We are maintaining our EUR 190 fair value estimate, with shares having recovered strongly by 40% since the May lows.

Soitec closed its fiscal 2023 (ended March 30) on a positive note, with sales for the fourth quarter up 16% at constant exchange rates and sales for the full year up 19%, in line with guidance. EBITDA margin for the full year came in at 36%, also in line with guidance. For fiscal 2024, sales are expected to remain flat on an absolute level, with a 15% decline in the first half of 2024 followed by a strong recovery in the second half. We are maintaining our EUR 190 fair value estimate and expect to make no or only minor adjustments to it when we revisit our model. Our medium-term sales and EBITDA margin forecasts remain more conservative than management’s targets, given the uncertainty brought by the macroeconomic environment and the semiconductor cycle change expected in 2023 (global semiconductor revenue is expected to decline 11% in 2023, according to Gartner).

We initiate coverage on Soitec with a EUR 190 fair value estimate and narrow moat rating supported by intangible assets. Shares currently trade at EUR 140, offering a 35% upside.

Soitec manufactures silicon-on-insulator, or SOI, and other engineered wafers for the semiconductor industry. Soitec buys plain silicon wafers and re-engineers them, adding layers of materials to improve efficiency and reduce power consumption. Foundries like Samsung or GlobalFoundries use SOI as it allows them to produce more efficient chips without the need for investing in smaller node sizes, hence saving money and reducing capital intensity. SOI is especially suitable for mobile, radiofrequency, and automotive applications.