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Notes On The Semiconductor Capital Equipment Sector

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An Investor's Take

DISCLAIMER: This note is intended for US recipients only and, in particular, is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.

Introduction

Allow me to introduce our latest contributing author, a subscriber of ours for many years who goes by the nom de plume of JamsODonnell and today brings a hard science background to a hard science sector. Here she presents for us a heads up on the semiconductor capital equipment sector. If you want to get into the who-does-what-and-why in chip manufacturing, there is a wealth of information already available, and we may provide some work on that in the future. For now, read up on this investor's take on the sector in advance of earnings season. Any questions please post them in Slack, or in comments to this article.

Stocks covered below include Applied Materials $AMAT , Lam Research $LRCX, KLA Tencor $KLAC, and $ASML .

Alex King, Cestrian Capital Research, Inc - 16 October 2023.

Semiconductor Capital Equipment - Earnings Season Starts Soon

by JamsODonnell.

The top 3 semiconductor equipment suppliers by revenue, Applied Materials (AMAT), ASML, and Lam Research (LRCX), will report their quarterly earnings over the next 5 weeks. (KLAC reports on 25 October). The industry is too foundational to ignore, much too complex to warrant deep coverage here. 

Personally, I’m looking to increase exposure to this sector because:

  • I’m a chicken. I like the growing dividends and the stocks buybacks and the A3 credit ratings and the overall smoother ride along the tech hype cycle.
  • While their leading-edge products take all the press, the trailing-edge market is robust, reliable, and free from international trade regulation constraints. 
  • Microchip mass manufacturing is a strategic industry and the few companies that can produce semi equipment at scale cannot but profit from the US and EU push to reshore production. Short of a Station-Eleven-like scenario, these companies should do just fine.

LRCX and ASML will report on October 18th, AMAT on November 16th. Fundamentals so far:

  • Revenue growth peaked in late 2021, still slowing for all three wrt previous quarter and YoY;
  • Gross margins steady for LRCX and AMAT, decreasing for ASML; UFCF margins up.
  • Deferred revenue growth slowing down (LRCX) or bouncing up and down at a low level (AMAT); 
  • LRCX most affected by the memory downturn and, by their own statement, not seeing the bottom yet; as of June 2023, only 42% of revenue came from memory-related equipment (vs. 70% in June 2019). 

Earnings calls vibes:

  • LRCX: in the July call Q&A, it was remarked a few times that some of their memory customers see sales still going down; restructuring sounded painful, having to let go of more senior people than anticipated (Apr 2023); China exposure reduced but China domestic market is strong. Share of revenue from Europe has more than doubled in 2 years. Tech developments: Dry resist ramping up, Lam equipment selected by “one large foundry/logic customer” among others.  Lam has close to 100% market share of the deep silicon etch tool needed for TSVs for high-bandwidth memory chips. 
  • ASML: good visibility all the way to 2025 as “the customers of our customers, the Apples and Nvidias and Qualcomms” already have their plans set. Trade restrictions do not impact what machines they can sell, only their specs. China domestic market is strong and strategically buying up more than they normally would. 
  • AMAT: smoother sailing than LRCX, more diversified. Guiding for small revenue slowdown. 

Charts (all from Oct 12th):

LRCX is underhyped I think: I have a small position and will probably add to it after earnings, whatever happens. 


ASML: no position yet. Personally I want to see more volume down here before I get in. 

AMAT: no position yet. Doing nothing for now.



For Cestrian Capital Research, Inc - 16 October 2023.