Zacks Industry Outlook Highlights: Applied Materials and Lam Research
Zacks Industry Outlook Highlights: Applied Materials and Lam Research
For Immediate Release
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 have accelerated digitization, driving 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 34.3% growth in 2021 WFE spending (previous 22.8%), on top of a 13.9% increase in 2020. There are three drivers: continued spending on leading edge logic, major memory producers expanding capacity, and investment at the trailing edge to alleviate supply chain constraints.
SEMI sees 34% growth in 2021 and 4.9% growth in 2022 with foundry and logic equipment spending (more than half of total WFE) growing 39% this year followed by another 8% growth in 2022; memory is a mixed bag with DRAM expected to grow 46% this year and NAND growing 13% this year and 9% in the next. Assembly and packaging will grow 56% and 6% in 2021 and 2022, respectively while semiconductor test equipment 26% and 6%, respectively.
Stocks like Applied Materials and Lam Research 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. At the back end, this is cut up into individual die, packaged for protection and use, electrical leads attached and sorted. Fabrication equipment demand is dependent on the level of semiconductor demand and the level of installed capacity.
Semi demand mainly comes from cloud, ecommerce and PCs (COVID-related acceleration), smartphones (moderating demand), IoT (strong demand), automotive (chip shortage), artificial intelligence, HPC, comm infrastructure (5G-related strength). AMAT, LRCX, and ASML are important
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 and sub 7nm), memory chip advancements (3D NAND processes are maturing, driving down cost, increasing layers are adding complexity), denser packaging (MEMS) and so forth. Materials research, device complexities, the need for greater manufacturing integration and new applications are also important factors.
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 #62, which places it in the top 25% 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 25% 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 36.9% increase from Nov 2020, while the 2022 revision amounts to a 41.1% 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. Last November, the industry pulled ahead of both the S&P 500 and the broader technology sector and it has continued to widen its lead ever since.
So we see that the stocks in this industry have collectively gained 95.4% over the past year, while the S&P 500 Composite and Zacks Computer and Technology Sector gained 33.8% and 38.5%, respectively.
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 28.85X, which is above the S&P 500’s 22.19X and just below the sector’s forward-12-month P/E of 29.65X.
Over the past year, the industry has traded as high as 31.11X, as low as 25.76X and at the median of 28.30X.
2 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, although a hybrid mode of operation has become more acceptable, with longer term positive implications for the semiconductor and allied industries. Semiconductor demand will also be boosted by their expanding application across sectors and countries.
The strength is not a temporary phenomenon but more likely to 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.
Here are a couple of semiconductor equipment stocks that are worth considering-
Applied Materials: 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 4.4% and 7.8% in the last 90 days (the company reports later this week).
The shares have appreciated 115.0% 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.
Lam Research Corp.: 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.
SEMI expects single-digit growth in 2021 memory equipment spending followed by 26% growth in 2022. Management expects WFE spending to be stronger in the second half of 2021 than in the first with growth continuing in 2022. Foundry/logic and DRAM are expected to be stronger than NAND.
The demand for semiconductors in the automotive, healthcare and security markets is helping Lam’s trailing edge business. Its customers are running at high utilization rates, which has led to robust demand for its technologies. The company has been adding capacity in the U.S., Korea, Taiwan and Malaysia to cater to the strengthening demand.
This stock has gained 46.7% over the past year. The Zacks Consensus Estimates for 2021 earnings is up 2.5% in the last 30 days. The estimate for 2022 is up 1.9%.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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