Soitec Is a Niche Player in the Wafer Semiconductor Industry

We initiate coverage on Soitec SOI 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.

Chips are produced by printing patterns (transistors) on silicon wafers and then cutting the wafers into tiny pieces. Although most chips are produced using plain wafers (made of pure silicon crystal), some applications require plain wafers to be re-engineered. Soitec is a provider of re-engineered wafers, adding thin layers of materials to improve wafer efficiency and reduce power consumption, with silicon-on-insulator, or SOI, wafers being its main market. Foundries like Samsung or GlobalFoundries use SOI wafers as they provide a cost-saving opportunity, providing similar performance as smaller node sizes (i.e. chips with smaller transistors) but without the need for investing in new, more complex production processes and only requiring marginal improvements to older production lines. Soitec has around 70% market share in the niches where it operates.

Soitec’s moat resides in its manufacturing technology and continued R&D investment in brining new substrates (re-engineered wafers) to the market. Its manufacturing technology is currently the only efficient way to manufacture SOI and other substrate wafers—as even bulk manufacturers like Shin-Etsu and Global Wafers prefer to license Soitec’s technology rather than developing their own.

In the next five years we expect sales to grow at a 20% organic CAGR as the company expands its capacity by 75% to 4.5 million wafers per year. We expect EBITDA margins in the 37%-38% range, expanding from 36% in fiscal 2022, due to operating leverage. Our estimates remain more conservative than management’s estimates, which aim for a 40% EBITDA margin by 2026.

Soitec’s main risks are potential alternative technologies that could arise in the next 10 years, although Soitec invests appropriately in R&D, which should keep it at the forefront of the industry.