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Investing in semiconductors through advanced equipment boom
The semiconductor industry has been thrust into the spotlight in recent months as the pandemic put a huge squeeze on manufacturing capacity globally.
This has led to a worldwide shortage of microchips across multiple industries with many leading semiconductor designers and manufacturers warning that microchips could remain scarce into 2022 or even 2023 despite billions being spent on new fabrication capacity.
TSMC, or Taiwan Semiconductor Manufacturing Company, Intel and Nvidia have all said they expected the crisis to drag on for a couple of years, as new plants take time to come online.
This is after TSMC, the world’s largest microchip manufacturer, upped its fabrication investment plans from $28 billion to $30 billion this year and plans to invest $100 billion over the next three years.
The Philadelphia Semiconductor index, or SOX offers a good insight into the performance of this part of the market and as the chart demonstrates it has massively outperformed the MSCI World since March 2020.
We reckon both ASML and Lam Research, both of which make equipment to support chip manufacturers, are two excellent way to play the semiconductor boom.
CRANKING UP CAPACITY
Like TSMC, US firm Intel also has substantial capacity investment plans, with high hopes of recapturing the industry pole position by targeting new microchips ranges designed and built on the latest technology.
For example, Intel 4 products, built on 7nm (seven nanometre) substrates, are expected to be production-ready during the second half of 2022 with products likely to ship through 2023. Intel 4 will fully embrace the latest EUV (extreme ultraviolet lithography) technology and aim to increase performance per watt by 20% and pack more transistors into the each semiconductor.
2024 will see 20A 5nm chips emerge using a new transistor design. ‘We understand that this is similar to the gate-all-around design of Intel’s foundry competitors such as TSMC and Samsung’, explain analysts at investment bank Berenberg. Industry speculation suggests that Qualcomm, one of the world’s leading chip designers, could switch to Intel foundries for 5nm technology.
Such hefty industry investment in fabrication expansion promises a sharp rise in advanced chip manufacturing equipment demand.
Global sales of semiconductor manufacturing kit are forecast to surpass $100 billion next year for the first time ever, according to forecasts from industry body SEMI, following a predicted 34% jump in 2021 to $95.3 billion.
In 2020, SEMI says $71.1 billion was spent worldwide on microchip manufacturing equipment.
CRUCIAL ADVANCED EQUIPMENT
What does seem clear is that leading equipment makers could enjoy bumper revenues and profits through the next few years. ‘Intel’s roadmap provides capex visibility, positive for semi equipment industry players,’ say Berenberg analysts. They name ASML, ASM International, Applied Materials, Lam Research and KLA Corp.
Dutch company ASML, for example, has been at the bleeding edge of lithography technology for decades and its $150 million a pop extreme ultraviolet machines are essential bits of kit in any semiconductor manufacturing facility, known as fabs.
‘We believe Intel’s detailed roadmap confirms the importance of ASML’s high NA EUV tool for making leading-edge chips,’ say Berenberg analysts. ‘In addition, the demand of EUV will keep increasing at Intel because of its incremental insertion of EUV tools over the coming years.’
Berenberg are not alone in championing ASML’s investment attractions. ‘We continue to prefer semi cap equipment to chipmakers near term; we prefer ASML among the group based on pricing power,’ Morgan Stanley wrote in a note to clients last month.
‘While elevated multiples are a common and legitimate concern that we encounter around our positive ASML view, the magnitude of potential upside still appears meaningful to us.’
Morgan Stanley models €27.4 billion of sales and €23.5 earnings per share for the 2025 full year, ‘equivalent to 10.8% and 17% compound average growth respectively between 2021 and 2025,’ the team calculate.
COMPLEXITY AT THE ATOMIC LEVEL
Making semiconductors is hugely complex and hinges on all sorts of advanced technology and tools that are used to create microscopic features using not only silicon, but a wide range of other materials at an atomic level of precision.
Beyond just silicon, many of these materials are insulators, some of them are electrical wiring for signals, and many require processes with fundamentally incompatible materials.
Silicon Valley-based Lam Research designs equally specialist equipment but its tools are aimed at helping semiconductor manufacturers improve yields, lower costs, shrink processing time and reduce defects on microchips. Customers include Intel,
Toshiba, Samsung and Micron Technology.
Lam was traditionally big in memory chips but this is an area booming thanks to the rapid rise of cloud computing, big data, mobile devices and other connected world applications.
Since data storage is the starting point of the digital economy, there is a huge demand for memory chips, particularly the more efficient variety. But technological advancements in areas like in-car electronics, 3D device architecture and advanced packaging technologies are also playing to Lam’s strengths.