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Zacks Industry Outlook Highlights ASML Holding and Advanced Energy Industries

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For Immediate Release

Chicago, IL – July 6, 2023 – Today, Zacks Equity Research discusses ASML Holding (ASML - Free Report) and Advanced Energy Industries (AEIS - Free Report) .

Industry: Semiconductors


The primary drivers of wafer fab equipment (WFE) demand are the strength of semiconductor demand and the existing capacity level. Other factors, such as constraints on selling semiconductors to China, the possibility of a recession, inflationary pressures and rising interest rates that impact consumer spending, or the diversion of consumer funds to leisure and/or travel activity affect one or both of the primary factors.
Gartner is not very optimistic about semiconductor demand in 2023. Beginning in the fourth quarter, it was seeing overall inventory surplus although there were shortages in some segments. Most of the inventory glut was in memory, a situation it expects will continue through 2023.

Memory demand is more dependent on consumer and computing gadgets, which makes it somewhat dependent on consumer purse strings. Analog demand is also expected to see inventory increases this year because of weakening supply and additional 300mm capacity.

Overall, inventories will continue to increase this year, with a corresponding pressure on prices. As a result, worldwide semiconductor revenue will decline 6.5% this year (previous 3.6% decline), followed by a big rebound (16.3% growth) in 2024. 
Enterprise demand is expected to hold up better, despite concerns related to the slowing economy because companies generally invest for the long term and place their orders well in advance. Additionally, because of the length of equipment sales cycles, macro concerns usually don't hurt the outlook immediately. This time too, chances are that equipment demand will pick up before it drops off (at least for some players).

Gartner expects both capex and WFE spending to drop 19% in 2023.
After three solid years, SEMI expects semiconductor manufacturing equipment revenue to decline 22% in 2023, driven by weakening chip demand and higher inventory of consumer and mobile devices. The 21% rebound in 2024 is attributed to strengthening demand for chips in high performance computing (HPC) and auto. In 2024, Taiwan is expected to be the top spender, followed by Korea, China, Americas, EMEA, Japan and Southeast Asia in that order.
Social distancing and the at-home economy have accelerated digitization, driving up chip demand. And digitization has become a broader trend as companies prioritize their technology investments. Developments in auto, industrial, clean energy, IoT, healthcare, online services and defense segments are positive for long-term semiconductor demand, and in turn, for equipment spending. 
A number of countries are moving to onshore semiconductor production as a strategic necessity, which is also a long-term positive for equipment demand. But there are cyclical challenges to those ambitions this year.
Despite this underlying strength, macro and geopolitical considerations, including restrictions on trading with China are likely to weigh on stocks like ASML Holding and Advanced Energy Industries.

This industry includes suppliers of manufacturing equipment, services and software for semiconductor wafer fabrication. Wafer fabrication involves the treatment of a silicon wafer to 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.

The back-end process involves cutting up the individual die, packaging for protection/use, attachment of electrical leads and sorting. The industry depends on semiconductor demand, which primarily comes from cloud (growth is decelerating), ecommerce (appears to be turning for the better), PCs (post-pandemic crash), smartphones (moderating demand), IoT, AI, HPC (strong), automotive and industrial (relatively steady) and comm infrastructure (5G-d

Factors Shaping the Industry

  • Export regulations remain one of the biggest concerns right now. The increasing polarization between the two largest economies makes this a longer-term concern. Samsung, SK hynix and TSMC have approvals but Gartner expects their China expansion plans to be conservative. Additionally, semi equipment makers generate substantial business from Chinese players, so the separation will be painful. It remains to be seen when fabs coming up at other locations can offset the business lost in China. While the fab construction subsidies in the CHIPS Act are bringing additional capacity to the U.S., and the European Chips Act and countries like China, India, Japan, South Korea and Taiwan are also aggressively wooing chipmakers to set up fabs, this is a bad time in the cycle to be building. Because of the huge investment involved, companies generally build capacity only in times of high demand. Otherwise, excess capacity only depresses prices, hurts profits and pushes out the payback period.
  • Successive rate hikes are gradually bringing down inflation although the softening in the labor market is much slower. Until the labor market weakens sufficiently, the rate hikes will only increase input cost, offsetting the relief from supply chains normalizing. In case the labor markets soften and we do enter a recession, demand for several end devices that use semiconductors will fall further (global economic weakness has already impacted consumer spending on technology products). Rate hikes also affect other economies, leading to a global slowdown. This hurts semiconductor companies and equipment makers that are usually global players.
  • Geopolitical tensions continue to simmer all over the world. There is the Ukraine war that is a general negative for the industry, especially for those making equipment using neon and other gases, the bulk of which are produced in the Ukraine and Russia. The threat of nuclear war is an added concern. China removing draconian COVID restrictions is a plus, but its increasing possessiveness about Taiwan is not. This is a big concern for the semiconductor industry in particular, given the amount of production that happens in the region. While Europe is navigating through the inflation well enough but it is hardly out of the woods yet. This kind of upheaval is not conducive to economic growth that can spur semiconductor demand. That said, the increasing use of electronics in communications and defense, and the role of semiconductors in helping companies to pull out of any economic slowdown makes semiconductor demand resilient in the long term.
  • 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 decade, which is a big positive for long term WFE demand. In the short term, however, it's a concern that memory typically makes up the largest part of WFE spending, because that's the segment with the inventory glut and the resultant price weakness. Most memory producers are expected to cut production in the second quarter, which will help to balance out inventory in the second half of the year. But the recovery will be slow and gradual, with memory makers divided on how the situation will play out for them.
  • Technology transitions, such as the move toward larger wafer sizes (fab upgrades to 300mm, plus 200mm demand), shrinking nodes (7nm and below), memory chip advancements (increasing layers are adding complexity), denser packaging (MEMS), etc. are positive for equipment purchases, since each transition requires advanced equipment for manufacturing. Materials research, device complexities, the need for greater manufacturing integration and new applications are also important factors. Other inflections will continue to come from new chip architectures like workload-specific ASICs; next-generation NAND; new materials in gate, contact and interconnect; advanced patterning; and advanced packaging. The increased complexity of building modern chips is therefore good for equipment makers.

Zacks Industry Rank Reflects Near-term Uncertainty

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 #107, which places it in the top 42% of nearly 250 Zacks-classified 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 that market conditions, although improving, are not yet supportive of growth.

The industry's aggregate earnings estimate revision for 2023 represents a 12.4% decline from Jul 2022. The 2024 revision represents a 3.9% decline from 2023.

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 Leads on Shareholder Returns

Looking at the Zacks Semiconductor-Wafer fab Equipment industry's performance over the past year, it appears that except for the brief dip in Oct 2022, the industry has traded at a premium to both the broader sector and the S&P 500. The industry's strong performance over the past year despite the weak outlook may be attributed to its long-term prospects and the relative stability that comes from the long sales cycles and contracts. These factors add to its attractiveness in uncertain times. 

Net-net, the stocks in this industry have collectively gained 70.0% over the past year, while the Zacks Computer and Technology Sector gained 23.9% and the S&P 500 Composite 15.7%.

Industry's Valuation Is Rich

On the basis of the forward 12-month price-to-earnings (P/E) ratio, a commonly used method of valuing semiconductor equipment stocks, we see that the industry is overvalued. It is currently trading at a 26.77X multiple, which is its highest point over the past year. The industry is also trading at an 8.6% premium to the sector's 24.66X and a 36.9% premium to the S&P 500's 19.55X.

Over the past year, the industry has traded as high as 26.77X, as low as 14.87X and at a median of 22.70X.

2 Stocks with Good Longer-term Prospects

With the pandemic in the rearview mirror, it's understood that the huge boost in semiconductor sales from the operating-from-home economy will not repeat, although the hybrid mode of operation has longer-term positive implications for the semiconductor and allied industries. Semiconductor demand will also be boosted by their expanding application across sectors and production in new geographies.

Equipment demand is more stable than chips, because semiconductor manufacturing equipment is high-value and so a part of the long-term planning process. That said, geopolitical tensions that disrupt the supply chain and increase cost, and therefore profitability could continue or even worsen.

Given the somewhat mixed prospects, most of the stocks in this industry currently have a #3 (Hold) rating. Below, we are taking a closer look at two of them:

ASML Holding NV: This is one of the world's largest suppliers of advanced semiconductor equipment consisting of lithography, metrology and inspection systems for memory and logic chipmakers.

While the concerns related to inflation, rising interest rates, risk of recession and geopolitical developments related to export controls persist, management still expects to generate 25% sales growth this year with slight gross margin improvement. As of now, the backlog remains strong, down only slightly from the last quarter, as demand still exceeds the company's ability to supply. However, orders are getting pushed out at some big customers, which is an indication of customer caution, or a broader slowdown in the future.

The Zacks Consensus Estimate for 2023 has dropped 11 cents (0.4%) from 60 days ago. The Zacks Consensus Estimate for 2024 has dropped 11 cents (0.5%) during the same period. These modifications shouldn't be viewed too negatively because after all, this is the only equipment company that is expected to generate strong double-digit revenue and earnings growth in both 2023 and 2024.

The shares are up 69.7% over the past year.

Advanced Energy Industries, Inc.: The company designs, manufactures, sells, and supports precision power conversion, measurement and control solutions worldwide for semiconductor fabrication, scientific research, medical equipment and other industrial applications.

Advanced Energy's diversification strategy is paying dividend right now with strength in industrial and medical markets more than making up for relative softness in the semiconductor segment. Customer engagement with new products is encouraging and management expects a record number of design wins this year.

This stock has gained 52.3% over the past year. The Zacks Consensus Estimates for 2023 and 2024 are up a respective 13 cents (2.8%) and 8 cents (1.4%) in the last 60 days. 

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit  for information about the performance numbers displayed in this press release.

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