Shares of semiconductor manufacturing equipment giants rose sharply on Thursday, with Applied Materials Inc. gaining ground. (AMAT 2.64%)Lam Research (LRCX 1.70%)KLA Corporation (KLAC 1.56%) It skyrocketed to 4.5%, 4%, and 4.3%.
Together, these three stocks represent a large portion of a large oligopoly in semiconductor equipment, and as a result, each stock has delivered superior returns over the long term. However, the short-term picture is not much better, with each down 20% to 32% from their summer highs.
But as of today, is that backlash coming to an end? These stocks rose sharply on Thursday, following the rise in Taiwan Semiconductor Manufacturing Co.’s share price. (TSM -1.16%) In its fourth-quarter earnings release, TSMC predicted higher-than-expected capital spending for next year, confirming a massive growth cycle over the next five years.
TSMC’s Spendingpalooza
TSMC is by far the most important manufacturer in the semiconductor manufacturing industry. While other chipmakers are trying to catch up to this market leader, TSMC currently has a near monopoly on today’s cutting-edge semiconductor production, supporting the world’s largest chip designers from Nvidia to Apple.
So while these companies also have large memory businesses, much of their logic revenue comes from TSMC. And these stocks have also fallen since the summer as investors began to question the sustainability of building AI. Furthermore, the non-AI semiconductor market, such as PCs and smartphones, is also somewhat lackluster.
However, comments regarding TSMC’s future are likely to allay many concerns. TSMC management currently projects a compound annual growth rate (CAGR) of nearly 20% in revenue over the next five years, from 2025 to 2029. Not surprisingly, that overall outlook is strengthened by the annual CAGR expected for AI accelerators to be in the mid-40%. TSMC pointed out that AI chips will account for almost mid-teens of overall revenue in 2024, and that proportion will increase significantly.
Of course, that growth will have to be supported by new semiconductor equipment, with TSMC predicting capital spending will reaccelerate from $38 billion to $42 billion next year. At the midpoint, this is significantly higher than spending in 2024 by 33%, and even higher than the previous annual peak of $36.3 billion in spending in 2022.
Needless to say, a 33% increase in capital spending bodes well for Applied, Lam, and KLA. Both Applied and Lam manufacture critical etching and deposition equipment for laying down and stripping transistor materials. With the switch to gated all-around transistors scheduled for this year and the advent of backside power delivery, possibly in 2026, both Ram and Applied are confident that these innovations will require more aggressive etching and therefore be more adaptable. The market is expected to expand. and a deposition step.
Additionally, all these meticulous manufacturing steps must be measured for defects at every stage of the process. KLA, the overwhelming market share leader in measurement and process control equipment, should also benefit from TSMC’s spending plans.
Semiconductor capital equipment stocks are great long-term holdings despite volatility
Both of these semiconductor equipment vendors are excellent buy-and-hold stocks for long-term investors. Not only are each company correlated with a vibrant semiconductor industry that is expected to outpace GDP for some time, but they are also highly profitable and return significant amounts of cash to shareholders.
The downside is that these stocks are volatile. After all, these stocks are down 20% to 30% from their all-time highs, and the semiconductor market isn’t even a traditional bear market.
But while these names are cyclical, the chip industry should continue to innovate and hit new highs over time. So, for investors who can deal with frequent drawdowns of 40% or more, these stocks should be on your buy list every time they dip. Today’s strong move after a recent six-month lull shows that.
Billy Duberstein and/or his clients work for Apple, Applied Materials, KLA, Lam Research, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Applied Materials, Lam Research, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
