IXYS Corporation (NASDAQ: IXYS) – the case for A

SHORT
Table of contents

• Investment Thesis
• Industry Analysis
• Company Overview
• Drivers
• Valuation
• Conclusion
 Investment thesis

IXYS’ inability to capture future market growth, costly acquisition strategy,

and increased price competition from competitive consolidation create a
pessimistic investment that has been overvalued in the market.
Recommendation: Sell FY 2017 Beg Price: $11.91 Price Target: $10.65 (10.6% upside)

RISKS

• The market believes that IXYS is able to maintain growth consistent with the
market, but this is not true due to its inferior product mix and slowing demand
• A growth strategy focusing on acquisitions over R&D creates inefficient
integration and has risk of product failure
• Strong price competition in majority of product groups, catalyzed by consolidation
of competitors

CATALYSTS

• Strong overall incoming demand due to Internet of Things (IoT) wave

• Strong, long-term relationships with suppliers
• Low leverage risk, despite aggressive acquisition strategy
 Industry analysis
OVERALL SEMICONDUCTORS

• Mature industry with typically slow growth relative to the US economy and can be
characterized by rapid innovation in a highly diversified and globalized setting
• U.S. supplies 50%+ of semiconductor demand (increasing production in parts of Asia)
• Market for semiconductors recently growing with increased electronics consumption (IoT),
greater industrial applications, and growing demand in Asia
• Highly R&D intensive products with firms investing on average 30% of their sales in product
innovation

PORTER’S FIVE FORCES ANALYSIS

New Entrants Substitutes Supplier Bargaining Buyer Bargaining Industry Rivalry

LOW VERY LOW MEDIUM-HIGH HIGH VERY HIGH
High startup costs Product is used in Depends on type, Demand for Compete solely based
and the industry is many different but machine suppliers electronics is on performance, so
extremely capital applications and foundries have increasing, companies must
intensive because (expertise/reliability) high power bc of concentrated in constantly innovate to
new semiconductor and its functions are specificity, while raw subindustries, and maintain market share
not replicable material suppliers and stay afloat
companies must the thread of
build a production have low because of backward integration
similar products
plant
 Industry analysis
KEY OPERATIONAL DRIVERS

1. Cyclic Nature
• Strong profits  invest in new manufacturing capacities  ramp up causes oversupply
 in aggregate, drop in prices  shut off capital spending  shortage  higher prices
• Result is cyclic years of A) strong acquisitions & B) drops in prices
2. Internet-of-Things Demand
• Network of physical objects that feature internet connectivity, and the communication
that occurs between (a result of increasing needs for efficiency and connected devices)
• 33.1% CAGR to 2021 (Source: RNR Market Research)

(Source: McKinsey & Co.)

(Source: The Hacker News)
 Company overview
OVERVIEW

• Specialized semiconductor company

• Designing, developing, manufacturing &
marketing niche semiconductors
• Founded in 1983 by Dr. Nathan Zommer
• Diversified industries (industrial,
transportation, computer, medical, etc.

BUSINESS STRATEGY

• Aggressive acquisition strategy instead of

R&D investment (2001, 2009, 2013, 2015)
• Outsources over 1/3 of production to
Samsung Electronics & other producers
• Shifting of overall product mix away from
Power Semiconductor division towards
Integrated Circuits (IoT chips)
 Company overview
KEY FINANCIALS CORE MANAGEMENT

Market Cap ($USD) 410.9M Dr. Nathan Zommer (Chairman, CEO, CTO)
Founder, strong grasp on R&D in industry, pioneer in niche
Enterprise Value ($USD) 297.6M
semiconductors, previous experience at GE + Intersil,
Revenue (TTM) 319M holder of 75 patents, & thought leader in niche
semiconductor industry
EBIDTA (TTM) 40M Mr. Uzi Sasson (CEO, President)
Experience in financial and operational management, strong
Price/Earnings (TTM) 22.4
understanding of tax/accounting processes in the
Stock Price ($USD) 11.91 semiconductor industry, & balances strong technical founder
with operational skills
ANNOTATED PERFORMANCE YTD

Introduces new “Wespack”

Increased margins, rectifier diode
Second straight Q earnings growth
with Rev increase

New 2.4 GHz

receiver for IoT
Announces new applications
3.2kV Thyristor

(Source: Google Finance

 COMPANY DEVELOPMENTS & DRIVERS
INFERIOR PRODUCT MIX & SLOWING DEMAND
• Market currently expects IXYS to capture proportional level of future growth in semiconductor
demand (IoT wave)
• We argue that IXYS will capture a much smaller percentage of this upcoming wave, and will
actually decrease in the long-term
• For buyers, consolidation of product vendors is key because it lowers costs
• IXYS offers a much smaller product mix
• As demand grows/diversifies in the future, buyers will switch to vendors that can bundle to
lower costs
• IXYS’ recent book-to-bill ratios indicate that demand is slowing for IXYS vs. the industry
 COMPANY DEVELOPMENTS & DRIVERS
ACQUISITION VS. R&D STRATEGY
• IXYS pursues A&D strategy (2001, 2009, 2013,
R&D to Sales
2015) to keep up with changes in the industry, and
relies less on R&D
• Higher variance and risk associated with
integrating the technology
• Gives less flexibility and options to react to market
changes quickly, as cash flows are locked up in
A&D
• Examples: manufacturing capacity, marketing/sales
PRICE COMPETITION DUE TO COMPETITIVE CONSOLIDATION
• IXYS has tried to shift its product mix away from
PS and towards ICs to better match the large
growth in demand (Internet-of-Things) there
• However, they have seen strong price competition
as bigger IC competitors have consolidated
• Larger consolidated companies are able to better cut
costs and charge lower prices
• Smaller companies typically follow suit to retain
customers
Valuation (Discounted cash flow)
COST OF CAPITAL

• Fama-French 3 Factor Model to estimate cost of capital

• Unlevered beta is with respect to the Russell 3000
proxy for the market and forecasted using comparables’
betas and Bloomberg adjustment
• MRP is aggregate forecasts of U.S. CFOs sampled by
Duke CFO journal
• MRP adjusted for 30-year time horizon of project and
replaces the survey’s 10-year TB with 30-year TB
• 3% deviation between CAPM and 3-Factor
Valuation (Discounted cash flow)
DCF OUTPUT & SENSITIVITY ANALYSIS

Bear Base Bull

$9.95 $10.65 $11.95
-16.5% -10.6% +.3%
• IoT infrastructure • Unable to capture • Stronger than forecasted
stunned market growth market growth
• Faster than expected • Acquisition • More efficient
growth of Asian fabs strategy plagued acquisitions for adding
by failures scale and product offers
Questions?