Highlight Reel
One of the delights of watching the World Cup is finding new players to fall in love with. Norway striker Erling Haaland won the world over as an unstoppable goal scorer (duh), with his charismatic social media antics, and by convincing everyone he's a real Viking.
His Man City club teammate and French national midfielder, Rayan Cherki, also won over some new fans dancing through midfield with the ball at his feet and threading disrespectful passes. His footwork tormented defenders. His vision melted their brains. His knack for creating moments of cheerful football mischief got inside opponents' heads and onto highlight reels.
Cherki's been at Man City only a year. He's not the type of player — elegant, mechanical — that defined the previous regime under Pep Guradiola. Man City have a new manager, Enzo Maresca. Cherki — light, clever, chaotic — is one of the players from which Enzo might fashion a new identity for the club.
All fans can say for the moment is “it'll be different.” Pep's results put him among the all-time great managers. Cherki is an all-time entertaining player to watch. In football and financial markets, regime change can be a worthwhile place to spend time.
Playing from behind
Just over the mountains from Cherki's hometown Lyon, toils Soitec. It’s a supplier of silicon wafers. It hopes to craft a new identity around a different kind of lightness.
The shop historically supplied materials that went into mobile-related stuff — cell phones and other radio communication devices. That business boomed after Covid. Soitec's customers binged. Then it crashed. Demand cratered to a level even lower than before the pandemic. Its customers are still hungover with inventory.
Soitec's sales dropped a third last year. It throttled back its factories. The weight of high fixed costs crushed margins. Those dropped by half. Shares have faded 40% from their 2022 peak. At the bottom they ran down 90%. Anyone familiar with the semiconductor industry recognizes this boom and bust. Semis are cyclical.
After the misfire, Radio-frequency products still make up most of the business — 52% last year. This business ought to recover at some point. But the company has built up other muscles, one’s that could ensure a more durable future.
Switch the field
Exploding compute demands ignited by AI have enabled some in the semiconductor value chain to pivot to more structured markets. This takes risk out of the business. It also allows firmer investments in new technologies and capacity.
Under these demands chip designers pursue new methods of smashing sand together to convince it to think. Silicon photonics is one area they've found success enhancing performance. The short version is that it uses light (photonics) instead of copper to connect sand (silicon) in chips. Soitec makes the inputs that TSMC, Skyworks, Broadcom et. al. use to make that. Right now, it's the only one that does at scale.
Its photonics line makes up less than half the business. That line doubled already this year. The pace looks to continue and pitch-in most of the company's expansion. In June, management said revenue would grow 30%. In September, it said 50%.
Soitec added capacity to deliver on anticipated demand. Your alarm bells might ring at this point. Isn't it still in the middle of an inventory glut in its RF business?
At the same time it announced new capacity coming online, Soitec announced ten long-term customers. Semiconductor materials buyers didn't used to sign long-term agreements at all. They’ve warmed up a bit. But these contracts are different still. They're take-or-pay. Soitec gets paid whether the customers take product or not.
The agreements serve structural stability in the business and play through whatever cycle comes next. They enable the company to rely on economics to take on longer-term investments, like its latest capacity expansion.
That capacity? It's sold out. The capacity the company's shopping today will make it to customers in 2027/2028. It’s also shifting capacity from its mobile business to its photonics one with minimal additional investment. Meanwhile, no other silicon photonics materials companies can deliver at scale today.
Game day
Lamplighter often plays companies pivoting from one business to another. Soitec's shift from a mobile-oriented one to an AI/data center one fits that game plan. Soitec's legacy business weighed on shares for years. Investors began to pay attention to its silicon photonics efforts earlier this year. This is the business that will lead the company forward. With shares playing from behind, the burgeoning end market and shift to long-term customer agreements ought to prove a winning setup for investors.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM and its clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.