The sudden shortage of semiconductors is disrupting automotive production and limiting revenue growth for Apple Inc. It’s created a stock market boon, however, for the makers of chip production equipment.
Those companies have emerged as the biggest winners from the supply crunch as chipmakers rush to add more factory capacity. Applied Materials Inc., the world’s biggest equipment maker, has seen its shares advance about 38% this year, making it the best performer in a semiconductor index. Brooks Automation Inc., Lam Research Corp. and KLA Corp. are each up more than 21%, nearly twice the gain in the Philadelphia semiconductor index. The stocks fell on Tuesday amid a chip slump following a two-day rally.
Expanding equipment budgets by major chipmakers and governments concerned about foreign dominance of production facilities are giving Wall Street increasing confidence that the rally has staying power.
“Over the next three to five years, this is definitely very bullish for semicap equipment in terms of overall tightness and focus on domestic supply,” said Krish Sankar, an analyst with Cowen & Co.
The shortfall is a problem that seemed unthinkable a year ago when a rapidly spreading Covid-19 virus sent economic activity plummeting as companies began efforts to reduce production in anticipation of ebbing sales. Instead, after an initial shock, sales in many industries surged and companies scrambled to boost inventories. Many chipmakers are now producing at maximum capacity and governments are suddenly looking at a dearth of homegrown plants as a national security risk.
Supply crunch
U.S. President Joe Biden signed an executive order last week to review the country’s supply chains for semiconductors and other products. While there aren’t expected to be any quick fixes, industry watchers say the long-term trend is clear: more equipment will be needed.
“The semiconductor industry is running on all cylinders, and you’re seeing companies that might in the past have been reluctant to commit to capex (capital expenditures) now all of a sudden trying to ramp up as quickly as they can,” said Daniel Morgan, a senior portfolio manager with Synovus Trust Co., which owns shares of Applied Materials.
Taiwan Semiconductor Manufacturing Co., which produces chips for Apple and Broadcom Inc., plans to spend $12 billion to construct a plant in Arizona. Some of the costs for that facility were included in the company’s capital spending plans for 2021 that sparked a rally in chip related stocks around the world in January. Broadcom’s capital outlays could total as much as $28 billion, up from $17 billion in 2020.
Huge manufacturers like Taiwan Semi building smaller plants in new regions creates particularly attractive opportunities for Applied Materials, Chief Executive Officer Gary Dickerson said on the Santa Clara, California-based company’s earnings call last month.
“You have to look at the scale of the factories they’re building and at least what’s been announced is smaller scale,” he said. “That somewhat less efficient factory size is a positive for Applied.”
In addition to Applied Materials, top picks for Cowen’s Sankar include Lam Research and MKS Instruments Inc.
“You have an environment where demand is very strong, supply is constrained and then you add to it domestic supply build out,” the analyst said in an interview. “At some point these things will normalize, but it won’t be any time soon.”
