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3 Stocks to Tap Continued Strength In Semi Equipment
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Summary
The primary drivers of wafer fab equipment demand are the underlying strength of semiconductor demand and the existing capacity level.
Social distancing and the at-home economy drove accelerated digitization that drove up chip demand through 2020. But this digitization has become a broader trend as companies prioritize their technology investments. Developments in auto, clean energy, IoT, online services and defense segments will ensure continued strength in semiconductor demand, thus driving equipment spending.
Additionally, China’s determination to be self-reliant in chips, the strongest driver of equipment sales in 2020, should remain an important driver until the country can make the equipment locally (not expected to happen in the next 5-6 years). Barring regulatory roadblocks from the American side, this is a tailwind for the industry.
Market researchers also see continued strength. Gartner is forecasting 22.8% growth in 2021 WFE spending (previous 7.8%), on top of a 13.9% increase in 2020. There are three drivers: continued spending on leading edge logic, major memory producers expanding capacity, investment at the trailing edge to alleviate supply chain constraints. SEMI sees 15.6% growth in 2021 and 12.2% growth in 2022 with foundry equipment spending growing 23% and flattening in 2022; memory growing single-digits in 2021 and 26% in 2022 (led by DRAM); power semiconductor equipment growing 46% in 2021 and 26% in 2022 and microprocessor equipment spending jumping 40% in 2022.
Wafer fabrication is a process during which a silicon wafer (usually 200mm or 300mm in size) is treated with successive layers of conductive and semiconductive material using stencil-like structures called reticles. After each deposition of material on the surface, the excess material is etched away and the wafer exposed to a light source to implant the design. This is the front end process. The back end process is involved in cutting up the individual die, packaging for protection and use, attaching of electrical leads and sorting.
Fabrication equipment demand is dependent on the level of semiconductor demand and the level of installed capacity.
Semiconductor demand primarily comes from cloud, ecommerce and PCs (COVID-related acceleration), smartphones (moderating demand), IoT (strong demand), automotive (chip shortage), artificial intelligence, HPC, communi
Factors Shaping The Industry
COVID has been both good and bad for the semiconductor industry, since it pushed up demand in some segments while depressing demand in others. Researchers are in agreement about the positive overall impact on WFE. This is not only because of the surge in semiconductor demand, which has a direct impact on the WFE industry, but also the fact that manufacturing operations in general have suffered less than services during this crisis.
Semiconductor demand is the primary driver of equipment purchases, although new fabs also play a big role. In fact, many new fabs are expected to come online over the next few years, which will make this a major driver in 2022 and beyond. According to SEMI, 19 new fabs will break ground in 2021, of which 15 are leading edge (300mm) and another 10 will join in 2022, of which 7 are leading edge, together generating demand for $140 billion worth of equipment over the next few years. It generally takes two years from ground-breaking to equipping, but SEMI expects some of these to start by the first half of next year. So the current strength in equipment demand has a long tail. It is also worth keeping in mind that equipment demand tends to be relatively stable in times of short-term challenges because they are made with a longer-term objective. Memory typically makes up the largest part of WFE spending, but of the 29 new fabs mentioned here, 15 are meant for high-volume foundry production with 30,000 to 220,000 wspm capacity and 4 relate to memory production with 100,000 to 400,000 wspm capacity.
China continues to play a big role (as both consumer and manufacturer) because of the government’s initiative to make the country a major producer of semiconductors. While there are political pressures from across the world, particularly from the U.S., the Chinese are very determined to get there and have their own global relationships and partners. The country is investing heavily in equipment and chips in anticipation of future difficulties from an American standoff. Of the 29 new fabs breaking ground in 2021 and 2022, 8 will be built in China and another 8 in Taiwan.
Technology transitions, an important consideration for equipment purchases, will continue to respond to the move toward larger wafer sizes (fab upgrades to 300mm, as well as continued demand for 200mm), shrinking nodes (sub 10nm), memory chip advancements (3D NAND processes are maturing, driving down cost), denser packaging (MEMS) and so forth. Materials research, device complexities, the need for greater manufacturing integration and new applications are also important.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued stability going forward.
The industry’s positioning in the top 33% of Zacks-ranked industries is a result of the strength in the earnings outlook of constituent companies in aggregate. The industry’s aggregate earnings estimate revision for 2021 represents a 49.1% increase from Jun 2020, while the 2022 revision amounts to a 73.5% increase.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforming On Shareholder Returns
The past year has been a good one for the Zacks Semiconductor-Wafer fab Equipment Industry. Although underperforming the S&P 500 and the broader sector in the first few months of the year, the industry pulled ahead in November and continued to widen its lead ever since.
So we see that the stocks in this industry have collectively gained 96.0% over the past year, while the Zacks S&P 500 Composite and Zacks Computer and Technology Sector gained 40.4% and 48.9%, respectively.
One-Year Price Performance
Image Source: Zacks Investment Research
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is a commonly used method of valuing semiconductor equipment companies, we see that the industry is currently trading at 27.83X, which is above the S&P 500’s 21.82X and just below the sector’s forward-12-month P/E of 27.88X.
Over the past year, the industry has traded as high as 31.12X, as low as 21.07X and at the median of 27.49X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
Image Source: Zacks Investment Research
3 Stocks To Ride The Boom
With pandemic concerns waning, it’s understood that the huge boost to sales from the operating from home economy will not repeat in 2021. But semiconductor demand will remain robust because of expanding usage across sectors and countries. The strength is not a temporary phenomenon but more likely be sustained in the foreseeable future, with new fabs and capacity being added at an accelerated pace. Moreover, equipment demand is relatively more stable than the chips themselves, because semiconductor manufacturing equipment is high-value and so, a part of the long-term planning process. So here are a few semiconductor equipment stocks that are worth considering-
Applied Materials (AMAT - Free Report) : This Zacks Rank #2 (Buy) company is one of the world’s largest suppliers of fabrication equipment for semiconductors, flat panel liquid crystal displays (LCDs), and solar photovoltaic (PV) cells and modules.
The Zacks Consensus Estimates for 2021 and 2022 earnings are up a respective 9.2% and 12.1% in the last 60 days.
The shares have appreciated 130.6% over the past year.
Being one of the leading players in the semi equipment space with major customers across important markets, the company is a beneficiary of strengthening demand in the industry, including in the red-hot China market.
Price and Consensus: AMAT
Image Source: Zacks Investment Research
ASML Holding N.V. (ASML - Free Report) : ASML is a leading supplier of semiconductor manufacturing equipment including lithography systems (extreme ultraviolet and deep ultraviolet systems for manufacturing at advanced and other nodes), metrology and inspection systems (eg. YieldStar optical metrology solutions to measure the quality of patterns on wafers and HMI e-beam solutions to locate and analyze individual chip defects) as well as other related solutions for memory and logic chipmakers.
This Zacks Rank #2 company has gained 88.1% over the past year. The Zacks Consensus Estimates for the 2021 and 2022 EPS continue their upward trajectory, rising a respective 1.1% and 0.6% in the last 60 days.
The buildout of digital infrastructure proved particularly beneficial for ASML in 2020 and this strength is expected to continue through 2021 and beyond as the current strength in the equipment market is likely to remain broad-based. Strength in the consumer, automotive and industrial markets are particularly relevant for the company.
Price and Consensus: ASML
Image Source: Zacks Investment Research
Lam Research Corporation (LRCX - Free Report) : Lam Research supplies wafer fabrication equipment for deposition, etching, cleaning and metrology, as well as related services that are used by semiconductor manufacturers in the front-end of the semiconductor manufacturing process. The company has significant exposure to the memory segment (approximately two-thirds of its business), followed by foundry and then logic.
So although equipment purchases will be across all segments, the relatively lower builds for memory in the next few years is a slight negative, which is partly why the stock has a Zacks Rank #3 (Hold) rating. But this is one of the strongest equipment suppliers out there and we are not talking about weakness in the memory market per se, but merely a condition of relative weakness because the number of memory fabs set to come online is lower than logic and foundry. But it’s still good with respect to history (SEMI expects single-digit growth in 2021 memory equipment spending followed by 26% growth in 2022). Also worth noting is the fact that memory fabs tend to be much larger than the other two meaning more equipment per fab.
This stock has gained 104.4% over the past year. The Zacks Consensus Estimates for 2021 earnings remains unchanged in the last 60 days. The estimate for 2022 dropped 5 cents during this period, after increasing by $6.06 in response to the last quarter’s earnings.
Price and Consensus: LRCX
Image Source: Zacks Investment Research
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
Image: Bigstock
3 Stocks to Tap Continued Strength In Semi Equipment
The primary drivers of wafer fab equipment demand are the underlying strength of semiconductor demand and the existing capacity level.
Social distancing and the at-home economy drove accelerated digitization that drove up chip demand through 2020. But this digitization has become a broader trend as companies prioritize their technology investments. Developments in auto, clean energy, IoT, online services and defense segments will ensure continued strength in semiconductor demand, thus driving equipment spending.
Additionally, China’s determination to be self-reliant in chips, the strongest driver of equipment sales in 2020, should remain an important driver until the country can make the equipment locally (not expected to happen in the next 5-6 years). Barring regulatory roadblocks from the American side, this is a tailwind for the industry.
Market researchers also see continued strength. Gartner is forecasting 22.8% growth in 2021 WFE spending (previous 7.8%), on top of a 13.9% increase in 2020. There are three drivers: continued spending on leading edge logic, major memory producers expanding capacity, investment at the trailing edge to alleviate supply chain constraints. SEMI sees 15.6% growth in 2021 and 12.2% growth in 2022 with foundry equipment spending growing 23% and flattening in 2022; memory growing single-digits in 2021 and 26% in 2022 (led by DRAM); power semiconductor equipment growing 46% in 2021 and 26% in 2022 and microprocessor equipment spending jumping 40% in 2022.
Stocks like Applied Materials (AMAT - Free Report) , ASML Holding N.V. (ASML - Free Report) and Lam Research (LRCX - Free Report) look attractive at the moment.
About The Industry
Wafer fabrication is a process during which a silicon wafer (usually 200mm or 300mm in size) is treated with successive layers of conductive and semiconductive material using stencil-like structures called reticles. After each deposition of material on the surface, the excess material is etched away and the wafer exposed to a light source to implant the design. This is the front end process. The back end process is involved in cutting up the individual die, packaging for protection and use, attaching of electrical leads and sorting.
Fabrication equipment demand is dependent on the level of semiconductor demand and the level of installed capacity.
Semiconductor demand primarily comes from cloud, ecommerce and PCs (COVID-related acceleration), smartphones (moderating demand), IoT (strong demand), automotive (chip shortage), artificial intelligence, HPC, communi
Factors Shaping The Industry
Zacks Industry Rank Suggests Bright Prospects
The Zacks Semiconductor Equipment -Wafer Fabrication Industry is a stock group within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #84, which places it in the top 33% of more than 250 Zacks industries.
Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. So the group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued stability going forward.
The industry’s positioning in the top 33% of Zacks-ranked industries is a result of the strength in the earnings outlook of constituent companies in aggregate. The industry’s aggregate earnings estimate revision for 2021 represents a 49.1% increase from Jun 2020, while the 2022 revision amounts to a 73.5% increase.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforming On Shareholder Returns
The past year has been a good one for the Zacks Semiconductor-Wafer fab Equipment Industry. Although underperforming the S&P 500 and the broader sector in the first few months of the year, the industry pulled ahead in November and continued to widen its lead ever since.
So we see that the stocks in this industry have collectively gained 96.0% over the past year, while the Zacks S&P 500 Composite and Zacks Computer and Technology Sector gained 40.4% and 48.9%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is a commonly used method of valuing semiconductor equipment companies, we see that the industry is currently trading at 27.83X, which is above the S&P 500’s 21.82X and just below the sector’s forward-12-month P/E of 27.88X.
Over the past year, the industry has traded as high as 31.12X, as low as 21.07X and at the median of 27.49X, as the chart below shows.
Forward 12 Month Price-to-Earnings (P/E) Ratio
3 Stocks To Ride The Boom
With pandemic concerns waning, it’s understood that the huge boost to sales from the operating from home economy will not repeat in 2021. But semiconductor demand will remain robust because of expanding usage across sectors and countries. The strength is not a temporary phenomenon but more likely be sustained in the foreseeable future, with new fabs and capacity being added at an accelerated pace. Moreover, equipment demand is relatively more stable than the chips themselves, because semiconductor manufacturing equipment is high-value and so, a part of the long-term planning process. So here are a few semiconductor equipment stocks that are worth considering-
Applied Materials (AMAT - Free Report) : This Zacks Rank #2 (Buy) company is one of the world’s largest suppliers of fabrication equipment for semiconductors, flat panel liquid crystal displays (LCDs), and solar photovoltaic (PV) cells and modules.
The Zacks Consensus Estimates for 2021 and 2022 earnings are up a respective 9.2% and 12.1% in the last 60 days.
The shares have appreciated 130.6% over the past year.
Being one of the leading players in the semi equipment space with major customers across important markets, the company is a beneficiary of strengthening demand in the industry, including in the red-hot China market.
Price and Consensus: AMAT
This Zacks Rank #2 company has gained 88.1% over the past year. The Zacks Consensus Estimates for the 2021 and 2022 EPS continue their upward trajectory, rising a respective 1.1% and 0.6% in the last 60 days.
The buildout of digital infrastructure proved particularly beneficial for ASML in 2020 and this strength is expected to continue through 2021 and beyond as the current strength in the equipment market is likely to remain broad-based. Strength in the consumer, automotive and industrial markets are particularly relevant for the company.
Price and Consensus: ASML
So although equipment purchases will be across all segments, the relatively lower builds for memory in the next few years is a slight negative, which is partly why the stock has a Zacks Rank #3 (Hold) rating. But this is one of the strongest equipment suppliers out there and we are not talking about weakness in the memory market per se, but merely a condition of relative weakness because the number of memory fabs set to come online is lower than logic and foundry. But it’s still good with respect to history (SEMI expects single-digit growth in 2021 memory equipment spending followed by 26% growth in 2022). Also worth noting is the fact that memory fabs tend to be much larger than the other two meaning more equipment per fab.
This stock has gained 104.4% over the past year. The Zacks Consensus Estimates for 2021 earnings remains unchanged in the last 60 days. The estimate for 2022 dropped 5 cents during this period, after increasing by $6.06 in response to the last quarter’s earnings.
Price and Consensus: LRCX
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
Click here to download this report FREE >>