Chip Equipment's Bright Prospects Are Etched in Stone and Silicon
We see strong growth and reduced cyclicality for the industry.
The wafer fabrication equipment space has been historically cyclical but has enjoyed stellar growth over the past five years thanks to sustained investment by leading-edge logic, foundry, and memory customers. The $50 billion-plus market is dominated by five major suppliers--Applied Materials (AMAT), ASML (ASML), Lam Research (LRCX), KLA (KLAC), and Tokyo Electron (8035)--which account for over 70% of the market and represent an integral part of the semiconductor ecosystem.
We foresee reduced cyclicality for the industry, thanks to consolidation of key customers and an increase in end-market diversity beyond PCs and smartphones toward the public cloud, 5G network rollout, a rise in automotive chip content, and artificial intelligence chip proliferation. Past downturns created challenging conditions for equipment suppliers and chipmakers alike to maintain investment levels and development of new chips or tools. We believe chipmakers (especially memory customers) are better equipped to navigate downturns with greater cash cushions and profitability levels, thanks to consolidation and more rational behavior from a supply/demand standpoint. With both the supplier and customer bases down to a smaller cohort (including the five aforementioned equipment vendors and chipmakers such as TSMC (TSM), Samsung (SMSN), Intel (INTC), and Micron (MU)), we think the wafer fabrication equipment market is now more supportive of consistent and resilient excess returns.
Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.