Understanding the Role of AMAT, LRCX, and KLAC in Semiconductor Growth



Global semiconductor market

The semiconductor industry (SMH) consists of SME (semiconductor manufacturing equipment) suppliers, foundries, and chip companies. According to SEMI‘s estimates, the global semiconductor market is expected to grow at a CAGR (compound annual growth rate) of 6.7% between 2015 and 2025.

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The SME market outlook

The SME market reached quarterly revenues of $10 billion in 2000. At that time, Applied Materials (AMAT) stock reached its all-time high of over $57.0. The stock has not been able to reach that level again.

At the 2017 Semicon Southeast Asia conference, SEMI Senior Director Industry Research and Statistics Dan Tracy stated that semiconductor capital spending and semiconductor manufacturing equipment spending is expected to grow 10.9% and 12.2%, respectively, in 2017. The largest growth is likely to come from memory, wherein spending is expected to rise 15% to 20%.

IC Insights expects semiconductor capital spending to rise 20% YoY (year-over-year) to $80.9 billion in 2017, with 40% of spending coming from memory companies. In July 2017, Samsung (SSNLF) announced a $18-billion capital expenditure to expand its semiconductor manufacturing capacity. SK Hynix also increased its 2017 capital expenditure by $1 billion, and Intel has allocated $12 billion toward capital expenditure.

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Impact on SME stocks

AMAT’s and Lam Research’s (LRCX) stock prices have risen 39% and 54.5%, respectively, since the start of 2017, placing them with the top-performing stocks in the PHLX Semiconductor Sector Index. Notably, LRCX made an offer to acquire KLA-Tencor (KLAC), but the proposal was rejected by regulators.

Analysts are optimistic about AMAT and LRCX and have given “buy” recommendations for these stocks. Analysts have been steadily increasing their price targets, from $37 in February 2017 to $55 in September 2017 for AMAT and from $130 to $194 for LRCX.

SME’s long term outlook

Chip companies and foundries are now increasing their capital spending on the anticipation of strong growth. If this expectation does not materialize, these companies will likely significantly cut their capital spending, sending SME stocks spiraling down in 2018 or 2019.

Meanwhile, China (FXI) is looking to establish its semiconductor manufacturing industry. SEMI Taiwan senior research manager Clark Tseng expects China to account for 20% of the global wafer fabrication capacity by 2020.


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