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Alpha And Omega - New Customers, Products, And Revenue

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About: Alpha and Omega Semiconductor Limited (AOSL), Includes: AAPL, AMZN, ENPH, FB, FLEX, GOOG, GOOGL, IFNNF, LGEAF, LNVGY, MU, NVDA, ON, PG, SEDG, SSNLF, VWAGY
by: TJ Roberts
Summary

B. Riley says AOS is a Buy, forecasting a ~$21 share price.

AOS now supplies Amazon, Facebook, Google, NVIDIA, P&G and Verifone.

5G and Huawei revenue potential for AOS is real.

AOS mosfets found in Apple's new quick-chargers.

Enphase, Solaredge and LG's inverters need millions of mosfets.

Alpha and Omega Semiconductor (AOSL) is a designer, developer, and global supplier of a broad range of power semiconductors and power ICs, including mosfets whose demand is soaring. AOSL's new 300mm fab in Chongquin, China, (shown below) meets that demand, and puts them in a league with only one other semi giant that has that tech, Infineon (OTCQX:IFNNF). Clearly a market window is open for AOS now, as big semi giants like ON Semiconductor (ON) hurry to catch-up.

Alpha & Omega Semiconductor Alpha and Omega Semiconductor, Chongquin, China, 300mm (12-inch) fab

Currently, a majority of analysts recommend AOSL as a Buy with B. Riley calling for a ~$21 share price on 9/16. As a result of customer base growth and new products, AOS should see a healthy 6-9% revenue increase in the coming quarters. With less than 25 million shares outstanding, AOS is currently selling at a ~0.5x revenue run-rate, and is undervalued compared to its competitors. Please read on to consider whether AOS can meet their $600 million 2021 and $1 billon 2024 revenue goals.

In July of 2019, AOS had their 11th Annual CEO Summit where they disclosed a list of major customers around the globe (shown below).

Alpha & Omega Semiconductor Customers

(Source: July, 2019, AOS 11th Annual CEO Summit, p.23, 7/31/2019)

Most recently that list has been revised (shown below) and reveals a total of 9 new customer disclosures; this represents a 15% increase which clearly demonstrates growth. These new disclosures are important for investors to consider in terms of the additional revenue that can be brought to the table for AOS.

AOS Customer List - Latest 10/1/2019

(Source: July, 2019, AOS 11th Annual CEO Summit, p.23 - 10/1/2019)

The new customer disclosures in the US are Amazon (AMZN), Facebook (FB), Flex (FLEX), Google (GOOGL, GOOG), NVIDIA (NVDA) and Verifone; in Europe they are Braun who is owned by Proctor & Gamble (PG), and in Taiwan, they are MSI and TPV.

The disclosure of Amazon as a customer is a major revelation by AOS. Amazon Web Services cloud computing and hosting revenue generated $8.4 billion in revenue for just the second quarter of 2019 alone. Amazon has also seen over 20 million of their mosfet-hungry Echo devices sold since inception. Braun may be a small brand, but they also require a high volume of mosfets for their shavers, toothbrushes, trimmers, cordless vacuum cleaners etc. Verifone offers portable "point of sale" terminal devices for swiping credit cards, and they also use mosfet technology. Facebook has sold ~1.9 million of their Oculus VR product in 2019 which reflects a sizable quantity of mosfets. Sony, another AOS customer, is the top vendor for VR devices with 2.2 million units sold. MSI Global is a leader in gaming and eSports. TPV Technology is a manufacturer of computer monitors with a 33% marketshare. These new company disclosures represent a large amount of mosfet-hungry products.

Turning to existing customers, Huawei is currently the industry leader in 5G technology. In AOS'es Q4-2019 earnings call, the CEO stated that they hadn't participated in 4G, but had recent “multiple design wins in” 5G and were “engaged with a couple of Tier-1 players”; so, this 5G revenue stream did not exist in previous quarters but does now. 5G is a multi-billion-dollar revenue industry, so AOS'es latest news signifies the start of a major new revenue source for the company, and not necessarily just from Huawei.

Complementing Huawei's 5G revenue for AOS comes from recent news where the USTR will not renew the latest waiver allowing US companies to supply Huawei. This means Huawei will need to turn to local sources for their semiconductors. Furthermore, it would probably be wise for China to shift to domestic alternatives for the foreseeable future regardless of the trade-war outcome. If China's 2025 plan is to achieve success, access to semiconductors is critical; therefore, AOS'es new 300mm fab in Chongquin will really be playing an instrumental part in that plan.

In the Q2-2019 earnings call, CEO Mike Chang stated that in the “near-term...trade tensions are adding more headwinds”, but AOS'es “growing momentum in higher-value, new products” was minimizing those “headwinds”; these new customers, as well as Huawei, were probably who Chang had in mind when making that statement about "new products". In reality, AOS is really immune from the tariffs since their underlying business model is demand-driven and not trade-driven.

Besides 5G revenue, another source of revenue for AOS which has "more than doubled from the same quarter last year" is quick-chargers. Quick-charger revenue should see an even greater increase now that Apple (AAPL) has adopted it in their latest medium- and high-end iPhone 11 models released on September 20th; furthermore, by adding quick-charger driver support in their latest iOS 13 operating system, Apple makes mass adoption of the technology much easier. These new quick-chargers will be the latest disruptor in the charger marketplace since they can charge a cell phone 3-times faster than previous models; the new charger will also be safer for charging the battery within the 20-80% range, which will ensure a longer battery life.

Although Apple never announces their suppliers on earnings calls and is not listed as an AOS customer, a tear-down image shown below by ChargerLab of the new 18-Watt Apple quick-charger identify a 30-Volt mosfet, AOS part number, AON7428. If Apple quick-chargers really include two AOS 30-Volt mosfets, then this could be huge revenue for AOS. *** Note: ChargerLab's website has a sporadic internet connection and may take a long time to load; the teardown may be viewable on their website.AOS 30V mosfet in Apple Quick-charger Source: ChargerLab Apple Quick-charger teardown, AOS AON7428 30V mosfet

In addition to the new cell phones having the ability to quick-charge, there are hundreds of millions of older cell phones (iPhone 8, X, XS and XR's) that are upgradeable for that convenience. Once these cell phones have upgraded to iOS 13, then they'll be able to use an Apple quick-charger. Interestingly enough, Apple is dropping support for hundreds of millions of iPhone 5s, SE, 6 and 6 Plus, as well as the iPad mini 2 and iPad Air, betting that the new iPhone 11 capabilities will give customers the impetus to buy a new phone. Also interesting is that the low-end iPhone 11 does not come with an Apple quick-charger, but if the owner buys one separately, they'll get fast-charging capability. All of this points to major quick-charger revenue.

Aside from Apple, AOS customers like Lenovo (OTCPK:LNVGY), Google (GOOGL), and Samsung (OTC:SSNLF) have quick-charging products; they may or may not be using AOS as a mosfet supplier. The quick-charger USB-C PD application reference design shown below calls for 4 mosfets — a high-voltage 600-Volt mosfet on the AC side and a 100-Volt mosfet and two 30-Volt mosfets on the DC side. AOS with its 300mm fab could become a primary source in USB-C PD quick-charging considering most companies with 200mm fab will not be able to undercut them.

Alpha & Omega Semiconductor - USB-C PD Application Flowchart Source: Alpha & Omega website, USB-C PD Application Flowchart

Also in favor of the reality of an Apple-AOS relationship is that the Apple quick-charger pretty much follows the logic of AOS'es USB-C PD application design; both have the high voltage AC-side mosfet with transformer, capacitor and then the DC-side mosfets. Realize that neither Apple nor AOS have made any announcements on their relationship at the time of this article.

Furthermore, consider that Infineon is now supporting Volkswagen’s (OTCPK:VWAGY) EV ramp-up requiring a massive amount of mosfets; maybe Infineon's easiest solution to magically create more fab floor space might be to shed some of their low-end margin business in non-auto applications. AOS’es 300mm fab could come to the rescue here, and Apple along with some of the other customers mentioned, could become major revenue sources. In addition, Infineon operates on a ~40% margin, so AOS with their 25-30% margins has the ability to compete with this semi giant.

Delving further into AOS'es mosfet business, the company has a new 100-Volt mosfet that could replace Infineon’s 100V mosfet found in PD quick-chargers. Depending on Infineon’s supply situation, AOS could become a secondary source to them. In terms of potential revenue, one cell phone with a battery protection chip and USB-C PD quick-charger would require ~5 mosfets at a ~$1.50 cost. Consider just the 75 million iPhone 11's estimated for this year and just ~75 million of the over 200 million iPhone-11 predecessors that can be upgraded to iOS 13. That would equate to ~$225 million in mosfet revenue or about one-third of AOS'es $600 million 2021 revenue. This sample projection should give investors a good idea of how lucrative quick-charging could be for AOS.

In addition to the quick-charging demand, the ever-improving photography and cinematography capabilities of cellphones, iPads, etc, are increasing the demand for storage, and the newest iPhone 11 is a perfect example of that. AOS classifies this type of storage revenue under “Enterprise and Cloud”. There was a downturn in this revenue in 2019 which was mostly attributable to inventory overhang and the Bitcoin Crash; furthermore, this downturn was industry-wide and noted by chip giant Micron (MU) in their earnings call slides. However, demand for DRAM chips for data handling and NAND chips for storage remains steady, so revenue should continue to stay positive for AOS.

Enphase Energy (ENPH), the leader of microinverter technology with over 10 million microinverters sold, is projecting a first-time quarterly volume of 2 million microinverters for Q4. AOS has Enphase and Enphase’s chief competitor, Solaredge Technologies (SEDG), as customers; both of them comprise the majority of the U.S. residential solar market which has been growing by ~60% annually. Further driving growth is the fact that 2019 is the final year of the 30% Federal ITC before it gets reduced, and then in January, the solar mandates begin in California requiring solar on new buildings.

Investors should consider how much the growing renewables market relies on mosfets. Each Enphase microinverter has 8 mosfets, so at 2 million microinverters in Q4, that’s over 16 million mosfets needed in just a single quarter by Enphase. In the Q2 earnings call, the Enphase CEO acknowledged that mosfet shortages were an issue in "past quarters", but that they "qualified multiple suppliers" and "signed key contracts" to rectify the supply issue; AOS with their 300mm fab may have come on as a secondary source here.

Flex (FLEX), another AOS customer, just built a new manufacturing plant which came online last quarter in Mexico; this new plant allows Enphase to double their microinverter production capacity. With Flex manufacturing expanding, AOS'es mosfet business and revenue growth should expand exponentially as well.

LG (OTC:LGEAF) with over $54 billion in annual revenue, is an AOS customer. In past AOS earnings calls, LG has been referred to as the "Korean customer" being supplied for their IoT appliance and telecom mosfet needs. Additionally, LG just announced NeON-R ACe 370-380-Watt high-performance AC Modules, which like Enphase, require a fair number of mosfets. AOS also mentioned “key strategic customers in home appliance and smartphone applications” without referring specifically to LG, so surely this implies the importance of this revenue source.

In summary, without material information on any of these aforementioned customers, it's hard to speculate the exact amount of incoming business and revenue. However, the need for enormous amounts of mosfets from these customers is quite clear.

AOSL trading volume is low, and the stock is avoided by many sell-side analysts, portfolio managers, and institutions because of the company's intensive capital need at lower 25-35% margins. However, energy transition to renewables, electrification of mobility with EV's, IoT and mobile fast-charging is exponentially increasing the demand for mosfets. AOS conservatively guided $119 million for Q2 which is a ~6% increase from their June Q1 quarter; this increase could be partially attributed to the customer disclosures and new products, or even to customers that have not yet been disclosed like Apple. AOS revenue should probably increase ~9% in Q3 to ~$130 million. With AOS’es 300mm fab, the company should soon move from the nebula of anonymity to mainstream visibility; for now, AOS remains an obscure, low-hanging fruit which investors should consider picking while it remains undervalued at a ~0.5x revenue run-rate. As always, please do your own due diligence, and good luck.

Disclosure: I am/we are long AOSL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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