Participating The Next Big Thing
The word "robot" was first introduced to the world in 1920 by Karel Čapek, a Czech playwright, in his play R.U.R. (Rossum's Universal Robots). In Čapek’s story, robots were more like workers with no feelings or rights. They were created to do the tasks humans didn’t want to do. The term “robot” actually comes from robota, which means forced labor.
As time passed, the robots we saw in pop culture became a lot friendlier. Think about R2-D2 and C-3PO in Star Wars—these robots weren’t just machines; they had personalities, they spoke to us, and they became characters we cared about. Then there’s Rosie from The Jetsons, the robotic maid who made life in the future look a lot easier and more fun. She wasn’t just cleaning the house; she was part of the family, helping out and even sharing moments with her human companions.
Fast forward to today, and the future is almost here. In September, Tesla demoed the latest version of its Optimus robot, showcasing the capabilities of humanoid robots in real-world applications. At the same time, a lesser-known humanoid robot, Figure 02, has already been working at a BMW plant in South Carolina, and by 2025, it will be fully integrated, working side by side with humans. Humanoid robots and automation, including self-driving cars, are about to take off in a big way. This is just the beginning, and it’s an exciting wave that I’m eager to ride.
I’ve discovered a fantastic way to invest in the future of humanoid robots and self-driving vehicles. The company I’m focusing on doesn’t just provide the brains and hearts of these robots; it’s also beginning to play a crucial role in tackling a massive global challenge: the surge in electricity consumption.
Electricity Demand is Surging
Right now, we’re seeing an explosion in electricity demand. Artificial intelligence is a major factor driving this surge, with data centers working overtime to process the massive amounts of information needed for AI applications. But it's not just AI—other factors like the growth of electric vehicles (EVs), growth in population and, soon, robotics are only going to add more pressure on the power grid. As more devices and technologies require electricity to run, the demand for energy will continue to rise.
As the demand for power continues to surge, many companies will be forced to find ways to reduce electricity consumption. This is where I see an exciting investment opportunity. The good news is, a solution is already emerging: silicon carbide (SiC) semiconductors. I believe SiC will play a pivotal role in helping industries lower their energy footprint while saving money, making it a key technology for the future.
How SiC Helps Reduce Electricity Consumption
One of the biggest ways silicon carbide (SiC) can make a difference is in data centers, which process massive amounts of AI data. SiC chips are far more efficient than traditional silicon chips. While traditional silicon tends to heat up quickly, requiring extensive cooling systems, silicone carbide generates much less heat, meaning it uses less energy to do the same work. No expensive cooling systems are required.
Data centers already consume huge amounts of electricity to power their servers, and a lot of energy is needed for cooling. In fact, these facilities also use a lot of water in cooling solutions to manage the heat generated by thousands of servers. SiC semiconductors will help by drastically reducing the amount of heat produced, lowering the energy and water needed for cooling and improving overall efficiency.
This growing need for energy-efficient solutions in data centers is clear—take Vertiv Holdings, a company focused on cooling systems for data centers. Their stock has surged roughly 150% over the past year, showing just how rapidly demand is increasing for more efficient, sustainable power solutions.
Now, imagine a future where data centers are powered by chips—like silicon carbide—that generate less heat and require little to no cooling at all. This would not only reduce electricity usage but also significantly cut the costs of running these systems. With SiC technology, we could be looking at a revolution in how data centers operate—more efficient, less reliant on cooling, and ultimately, far more profitable.
Electric Vehicles
The same goes for electric vehicles. SiC is a game-changer when it comes to managing power in EV batteries. SiC semiconductors enable more efficient power management, which helps cars go farther on less energy.
Because SiC chips produce much less heat than traditional materials, the power systems in electric vehicles don’t need bulky cooling systems. As a result, EVs can be lighter, which improves efficiency and driving range. Additionally, the absence of cooling systems lowers manufacturing costs, making electric vehicles more affordable to produce and ultimately more affordable for consumers. This technology will be essential in the push toward more sustainable, cost-effective electric transportation.
Robotics
And then there’s robotics. As robotics and automation continue to revolutionize industries, the demand for electricity will surge even further. Robots, whether in manufacturing, healthcare, or logistics, require significant power to perform tasks efficiently. The rise of automation in factories, warehouses, and even in homes will mean more machines working around the clock, all of which need a reliable and consistent energy source.
These robots rely on advanced power systems to operate seamlessly, and as the technology becomes more widespread, it will add even more strain on the electrical grid.
Supplying The Crucial Components
In essence, we’re headed toward a world where the demand for high-power electronics will only continue to grow. A world filled with more electric vehicles, AI-driven data centers, humanoid robots, and countless automation devices.
At the core of all these innovations are semiconductors. These chips are often the workhorses behind the development of humanoid robots and cutting-edge AI systems. While artificial intelligence might be considered the "brain" that powers decision-making, semiconductors are the nervous system, enabling the robot to process data, interpret its environment, and respond. Without semiconductors, AI systems wouldn't have the computational power they need to function, and robots wouldn’t be able to carry out tasks or interact with the world.
But semiconductors aren’t just the brain—they’re also the heart. They power the motors, sensors, and energy management systems that allow robots to physically move and interact. Much like how the heart pumps blood through the body, semiconductors ensure that the robot has the energy needed to function. They allow everything from the robot’s limbs to its processors to run efficiently and respond to commands.
In this sense, semiconductors act as the connective tissue, linking the AI brain and the robot body, enabling them to work in harmony. As robotics continues to evolve, semiconductors will become even more critical, powering the next generation of intelligent, adaptable robots that can work alongside humans in a wide range of industries.
That's why, for this issue, I’m picking a company that is perfectly positioned to participate in this wave of technology. A company that provides the crucial components that will power the next generation of electric vehicles, robotics, and data centers.
ON Semiconductor
When I think about the future of high-power electronics, ON Semiconductor really stands out to me as a company that’s perfectly positioned for growth in this space. They’re supplying some of the most important components for industries that are only going to get bigger, like electric vehicles, data centers, and robotics.
One of the big reasons I’m so excited about ON Semiconductor is their silicon carbide (SiC) technology. It’s a game-changer for the future, and it's already proving to be crucial for powering the next wave of innovation. Right now, SiC is still a small part of ON’s overall business, but that’s changing fast.
ON Semiconductor is a powerhouse in power management solutions across several rapidly expanding industries. Their semiconductor solutions are powering everything from electric vehicles and advanced driver-assist systems (ADAS) to the automation and robotics transforming the manufacturing and healthcare sectors.
ON Semiconductor’s Role in the Electric Vehicle Revolution
In the electric vehicle (EV) space, ON Semiconductor is a key player in supplying power semiconductors that manage how energy flows through EV systems. These chips are critical for everything from battery management to motor control to advanced driver-assist systems.
With the increasing adoption of electric vehicles, the demand for ON Semiconductor’s chips is only going to rise. ON is already working with major automakers like Tesla, Volkswagen, Hyundai, and most recently, Subary.
Driving Robotics and Automation
As the world becomes more automated, ON is helping to power the robots and devices that are reshaping industries. Their semiconductors are at the heart of the energy systems that allow robots to move, process information, and perform tasks alongside humans.
As automation becomes more integrated into everyday life, ON Semiconductor is well-positioned to meet the rising demand for energy-efficient solutions in robotics and automation.
Financials
Annual Financial Information
| In USD | 2023 | 2022 | 2021 | 2020 |
|---|---|---|---|---|
| Sales | $8,253M | $8,326M | $6,740M | $5,255M |
| Gross Profit | $3,884M | $4,077M | $2,714M | $1,716M |
| Gross Margin | 47.1% | 49% | 40.3% | 32.7% |
| Net Income(loss) | $2,184 | $1,902 | $1,009 | $234 |
| EPS | $2.4 | $2.3 | $0.1 | $1.4 |
| Shares Outstanding | 446M | 448M | 444M | 419M |
| Cash | $2,483M | $2,951M | $1,352M | $1,080M |
| Debt | $2,543M | $3,046M | $2,914M | $2,960M |
| FCF Margins | 4.9% | 19.2% | 19.1% | 7.6% |
| Free Cash Flows (outflows) | $402M | $1,597M | $1,290M | $400M |
| ROE | 31.2% | 35.2% | 24.7% | 6.8% |
| Share Buybacks | $631M | $338M | $39M | $85M |
ON Semiconductor: Key Segments
ON Semiconductor generates its revenue primarily through the sale of semiconductor products to distributors and direct customers. They also earn a smaller portion of their revenue from product development agreements and manufacturing services.
The company operates in three major segments that drive its revenue: Power Solutions Group (PSG), Analog & Mixed-Signal Group (ASG), and Intelligent Sensing Group (ISG). Here’s a breakdown of each:
ON Semiconductor: Q3 Results and 2025 Projections
In terms of revenue distribution, ON Semiconductor saw 47% of its revenue come from PSG, 37% from ASG, and 16% from ISG in the third quarter of 2024. This diversified revenue mix showcases the company’s broad reach across several high-growth markets, including automotive, industrial, and advanced imaging technologies.
ON Semiconductor sells its products both directly to customers and through distributors. In the third quarter of 2024, 57% of revenue came from sales to distributors, while 43% came from direct customer sales. Key direct customers include major players like Tesla, Volkswagen, and Hyundai, while their distributors help extend reach to a wider base of OEMs and contract manufacturers.
In the third quarter of 2024, ON Semiconductor reported revenue of $1.76 billion, in line with analysts' expectations. However, the company experienced a 19.2% year-on-year decline in revenue, mainly due to a 23% drop in sales from its Power Solutions Group (PSG) and a 15-16% decline in both Analog and Mixed-Signal Group (AMG) and Intelligent Sensing Group (ISG). Despite this, adjusted EPS of $0.99 exceeded estimates by 2.4%, signaling strong execution and financial management. Free cash flow margin also showed significant improvement, rising to 16.7%, up from 6.1% in the same quarter last year.
Looking ahead, the company has cautious guidance for Q4, projecting $1.76 billion in revenue and an adjusted EPS of $0.98. ON Semiconductor is navigating through a tough macro environment, particularly in the electric vehicle market, which has been a key growth driver. However, CEO Hassane El-Khoury emphasized that the company remains focused on long-term growth, particularly in the power management space, as demand for energy efficiency rises across industries.
Long-term relationships with strategic customers allow ON Semiconductor to secure repeat business and maintain a steady stream of revenue. Many of their agreements contain minimum purchase commitments, ensuring consistent demand for their semiconductor products.
Revenue by Segment (as of Q3/24)
2024 Financials
As of the latest quarter, ON Semiconductor is in a solid financial position with $2.7 billion in cash, $3.34 billion in long-term debt, and working capital of $4.4 billion. For the nine months ending September 27, 2024, the company generated $777 million in free cash flow (FCF). It’s also been actively returning value to shareholders, having spent $450 million on share repurchases so far this year. Gross margins were 45%.
While the company doesn't pay a dividend, its aggressive share buyback strategy signals its commitment to enhancing shareholder returns. Looking ahead, ON plans to expand its free cash flow margins to 25-30% and increase its gross margins to around 53%. The company is also aiming to return roughly 50% of free cash flow to shareholders via continued buybacks, solidifying its focus on long-term value creation.
The Opportunity
Looking at ON Semiconductor, it’s clear that the company is strategically positioned in industries that are poised for significant growth in the coming years. With a total addressable market (TAM) of roughly $44 billion, growing at an impressive 18% CAGR, ON Semiconductor stands to benefit from these expanding sectors. Here’s a breakdown of its key market opportunities:
While the long-term outlook is strong, one area of concern in the short term is the EV market. Yes, it’s set for impressive growth, but we might see a slowdown in spending as the global economy faces headwinds. The potential for a global economic slowdown could impact growth in the near term, and that could create a temporary slowdown in the EV market and related sectors.
For me, ON Semiconductor represents a way to invest in the future I believe in—a future with massive potential. However, I’m keeping a close eye on the market and potential short-term volatility. I think we might see an opportunity to pick up shares at a better price, ideally in the low $50s, especially if the broader market experiences a correction. For now, ON Semiconductor is firmly on my watchlist, and it’s definitely one of my top picks when the time is right.
More Yield Please.
Here we are again—another year in the books, and 2024 is wrapping up. The U.S. Federal Reserve has lowered rates again by 25bps, and Canada followed suit with a larger cut of 50bps. The Bank of Canada mentioned that the economy is weaker than expected, with unemployment rising.
This only confirms my suspicion that the Canadian economy is hanging by a thread. I’ve recently learned that Thind Properties, a developer in Vancouver, has several projects in receivership. Real estate in Toronto and Vancouver seems to be struggling or barely holding on. I sense that something is going to break in the Toronto real estate market, and when it does, it could trigger a domino effect—one that might lead to panic here at home.
Looking ahead to 2025, I honestly have no idea which direction the economy and the markets will go. There are many signs that consumers and small businesses are struggling, and I’m seeing it firsthand in my city. I hear it from tradespeople, too. A real estate shock in Canada would put a lot of people out of work, and things could get ugly.
But there’s also the possibility that the markets continue to rise. I have a hunch that we’re in the early stages of a new arms race—the race to space, AI supremacy, quantum computing, and robotics. With Trump and his team igniting American animal spirits, I think we’ll see huge infrastructure investments in the U.S., which could propel stocks higher for another year.
Ideally, a market crash would be the best outcome for my portfolio, as I'm sitting on over 80% in cash. A crash would allow me to scoop up great stocks at bargain prices. But right now, holding cash is getting tougher. Yields are dropping, and where I could have earned 5.45% on a one-year GIC with monthly income last year, now the same GIC is offering only 3.40%.
To combat this, I’ve added two ETFs that offer yields above 4%. First, I added the BMO Money Market Fund (TSX:ZMMK), which has a yield of 4.81%. This ETF is solid—it trades around $50 and typically stays within a range of $49.50 to $50.50. It invests in high-quality money market instruments, including treasury bills, bankers' acceptances, and commercial paper, all of which mature in less than 365 days. It should be easy to convert into cash when needed.
I also added some units of the Purpose Enhanced Dividend Fund (TSX:PDIV), which pays a generous 12% dividend monthly. This fund invests in Canadian and U.S. dividend-paying companies and generates additional income by selling covered calls and cash-covered puts. While this ETF won’t offer much protection in the event of a crash, it pays a strong yield and holds solid companies like Enbridge, TD Bank, TC Energy, Abbvie, and Procter & Gamble. The ETF may not have outperformed the market, but it’s the income that I’m after. While I wait for the crash of a lifetime, I’m building a foundation of high-yield, income-producing ETFs to generate monthly cash flow.
Prepared for 2025
As we move into 2025, my strategy is to earn close to 5% on my cash while using the income generated to make small investments in stocks that are well-positioned for the a potential infrastructure boom.
In preparation for a potential market downturn and as downside protection, I’ll be focusing on cash-rich and profitable companies that can weather a prolonged recession. I also want to make sure I’m getting paid while I wait. My approach is to deploy my principal cautiously, focusing on high-income-generating positions, and then use the income to invest in small positions within sectors that should thrive in the future, like energy, AI, and commodities.
As we close the chapter on 2024, I’m looking forward to 2025 being a productive, profitable, and eventful year.
Merry Christmas and Happy New Year! Wishing you all a profitable and prosperous 2025.
Portfolio Composition
| As of December 20, 2024 | |
|---|---|
| Category | Portfolio Weight |
| Cash and GICs | 81.97% |
| Speculative Picks | 2.34% |
| Defensive Picks | 14.95% |
| Crypto | 0.74% |
| TOTAL | 100% |
Remember that the content of this newsletter is neither a stock recommendation nor investment advice. This is just something to consider. You can access my watchlist and portfolio through the link below. By clicking the link below you accept all responsibility for any potential losses that might result from buying any of the stocks mentioned in this newsletter.