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On Thursday, shares of prominent semiconductor equipment manufacturers experienced significant gains, with Applied Materials (AMAT 4.54%), Lam Research (LRCX 4.03%), and KLA Corporation (KLAC 4.33%) rising by 4.5%, 4%, and 4.3%, respectively.
These companies play a crucial role in the semiconductor equipment market, forming a major part of its oligopoly. Historically, they have delivered strong long-term returns, though their recent performance has seen a notable decline, with stock values falling between 20% and 32% compared to their peak levels during the summer.
However, this downward trend may be reversing, thanks to a key announcement from Taiwan Semiconductor Manufacturing (TSM 3.86%). After releasing its fourth-quarter earnings, TSMC projected significant increases in capital expenditures for the upcoming year, reinforcing the outlook for a robust five-year growth period in the semiconductor sector.
TSMC’s Significant Investment Plans
As a leading player in semiconductor manufacturing, TSMC stands out as a dominant force, holding a near-monopoly in cutting-edge semiconductor production. Its collaboration with major chip designers, including Nvidia and Apple, amplifies its influence in the industry.
While these tech giants also engage in large-scale memory production, a substantial portion of their logic revenue is derived from their relationship with TSMC. Recently, investor sentiment has been cautious due to concerns regarding the longevity of AI-related demand and the relatively sluggish performance in non-AI markets, such as PCs and smartphones.
However, TSMC’s recent forecast appears to alleviate those worries. Management now anticipates a compound annual growth rate (CAGR) of nearly 20% for revenue from 2025 to 2029, with AI-related semiconductor products expected to grow at an impressive CAGR of mid-40%. TSMC highlighted that AI chips could make up about 15% of its overall revenue in 2024, a percentage likely to increase considerably in subsequent years.
This anticipated growth will necessitate significant investments in new semiconductor equipment. TSMC plans to increase its capital expenditures for the upcoming year to between $38 billion and $42 billion, representing a noteworthy 33% rise compared to its 2024 spending and well above the previous peak of $36.3 billion in 2022.
Such an increase in expenditures is highly beneficial for Applied, Lam, and KLA. Both Applied and Lam specialize in critical etch and deposition equipment essential for processing transistors. With the industry’s shift towards gate-all-around transistors and advancements in power delivery expected by 2026, both companies are likely to expand their market opportunities as these innovations require more complex manufacturing techniques.
Moreover, all stages of this intricate production process must undergo rigorous defect measurement, positioning KLA, the leader in metrology and process control equipment, to also gain from TSMC’s investment plans.
Long-Term Potential of Semiconductor Equipment Stocks
The semiconductor equipment sector includes vendors that are strong candidates for long-term investment. The semiconductor industry is expected to outpace general economic growth for years to come, and these companies consistently generate substantial profits and return significant cash to their shareholders.
However, potential investors should be aware of the inherent volatility associated with these stocks. Prices for these names have dropped 20%-30% from their previous highs, even without entering a traditional bear market for semiconductors.
Despite this cyclicality, the chip industry’s ongoing innovation promises a path to recovery and future growth. For investors capable of weathering significant fluctuations, often exceeding 40%, this sector is worth considering for purchases during price dips. The strong rebound observed recently after a period of stagnation illustrates this investment strategy effectively.
Source
www.fool.com