Why Semiconductor Equipment Stocks Applied Materials, Lam Research, and KLA Corp. Rallied Today

On Thursday, shares of major semiconductor equipment companies saw a significant jump, with Applied Materials (AMAT) rising by 4.5%, Lam Research (LRCX) increasing by 4%, and KLA Corporation (KLAC) climbing by 4.3%. This rally was particularly noteworthy as these three companies represent a substantial portion of the semiconductor equipment market, which operates as a tight oligopoly.

Despite their strong fundamentals and long-term performance, the near-term outlook for these stocks had not been as favorable, with each experiencing declines of 20% to 32% since their peaks in the summer months. The question on investors’ minds was whether this downtrend was coming to an end.

The catalyst for the rally came from Taiwan Semiconductor Manufacturing Company (TSMC), which reported its fourth-quarter earnings and provided an optimistic forecast for capital expenditures in the coming year. TSMC anticipates a significant growth cycle spanning five years, serving as a positive signal for the entire semiconductor ecosystem.

TSMC's Spending Surge

TSMC is a key player in the semiconductor industry, holding a virtual monopoly on cutting-edge semiconductor manufacturing. It supports major chip designers globally, including companies like Nvidia and Apple. Given the cyclical nature of the semiconductor market, many had expressed concerns regarding the sustainability of the AI-driven demand. Additionally, other semiconductor markets, like personal computers and smartphones, had been showing weaker performance.

However, TSMC's projections provided much-needed reassurance. The company now anticipates a compound annual growth rate (CAGR) of nearly 20% for its revenue over the next five years, covering the period from 2025 to 2029. Significantly, TSMC expects AI-related revenue to grow at a mid-40% CAGR, highlighting the increased importance of AI chips in its overall financial outlook.

Furthermore, TSMC is expected to ramp up its capital expenditures to between $38 billion and $42 billion, a striking increase of about 33% over its spending in 2024 and surpassing its peak expenditure of $36.3 billion in 2022. This increase is a positive sign for the semiconductor equipment sector, particularly for Applied Materials, Lam Research, and KLA Corporation.

Both Applied Materials and Lam Research manufacture vital etch and deposition equipment essential for the production of semiconductors. As the industry transitions to gate-all-around transistors and anticipates new technologies like backside power delivery, their market prospects will expand due to the need for more intricate production processes. Additionally, KLA, as the market leader in metrology and process control equipment, will greatly benefit from TSMC's increased spending plans by being crucial for measuring and ensuring quality during the manufacturing process.

Long-Term Viability of Semiconductor Equipment Stocks

For long-term investors, stocks of semiconductor equipment companies like Applied Materials, Lam Research, and KLA represent solid opportunities. The semiconductor industry is expected to grow faster than the overall economy for the foreseeable future, providing these companies with the potential for sustained profits and significant returns to shareholders.

However, investors should be mindful of the inherent volatility within this sector. The stocks have seen declines of 20% to 30% from their highs, even without experiencing a traditional bear market. While these stocks can be cyclical, innovation in the semiconductor industry tends to push markets to new heights over time. For those willing to endure larger market fluctuations, investing in these stocks during downturns could prove beneficial. The robust market response seen on Thursday, following a period of stagnation, reflects this potential.

semiconductors, stocks, investing