The coming year isn’t likely to be a great one for many companies in the business of semiconductor-manufacturing gear. A falling tide doesn’t necessarily lower all boats, though.
Consider the two largest companies in the market. Applied Materials (AMAT) reported last week that its strong double-digit growth over the last nine quarters came to a screeching halt during the company’s fiscal fourth quarter, when revenue rose barely 1% from the same period last year. Applied also projected a drop in revenue for the current quarter ending in January. Wall Street now expects the company’s revenue to fall 9% for the fiscal year ending next October, which would be its first annual drop since 2013.
Analysts see the opposite for ASML (ASML). The Dutch company that sells lithography tools for chip makers is seen growing sales by 10% next year. At an analyst meeting earlier this month, ASML lifted its revenue target for 2020 by 18%, citing strong demand for its extreme ultraviolet, or EUV, equipment. Even Applied noted in a Nov. 15 earnings call that EUV orders are starting to cut into demand for its own gear.
Why the divergence? Much of Applied’s strength over the last couple of years has come from demand for tools used in the production of memory chips. But capital expenditures in that segment are declining as producers cope with slowing demand and falling prices. Conversely, spending on what are called foundry tools is expected to grow as chipmaking giants like Taiwan Semiconductor Manufacturing (TSM) and Intel Corp. (INTC) upgrade their manufacturing lines to new processes. Wes Twigg of KeyBanc Capital projects a 12% drop in memory capex and a 14% jump in foundry capex next year—a reversal of the spending pattern over the past year.
That is good for ASML, which is effectively the only game in town for EUV gear. EUV is a form of lithography that uses a new type of laser to carve circuitry into microprocessors at a much thinner width than what is possible with today’s most commonly used tools.
As such, EUV is key for chip makers hitting the limits of Moore’s Law as it gets harder to shrink processors to squeeze out more performance with each new generation. ASML expects to ship 18 EUV systems this year and sees that number jumping to 30 next year. The technology is expected to play a major role in the new production processes that TSMC and Intel are both scaling up.
But EUV systems are also expensive, and chip makers are expected to trim their overall capital spending next year following a big jump over the last two. That means ASML will likely get a growing slice of a shrinking pie. Mr. Twigg sees KLA-Tencor (KLAC) benefiting as well, as EUV adoption is expected to boost demand for that company’s testing and process control gear.
Both stocks are down from the market’s brutal selloff over the last several weeks, though their share prices have also fared better than those of their peers so far this year.
In chip equipment, there is something to be said about being in the right place at the right time.
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