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With chipmakers planning to build more factories amid continuing semiconductor shortages, these were supposed to be boom times for semiconductor equipment stocks. But shares of chip gear makers are facing headwinds as some chip manufacturers have lowered their capital spending plans.
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Taiwan Semiconductor Manufacturing (TSM), the world’s top contract chipmaker, on July 14 reduced its capital expenditures target for 2022 to the low end of its guidance range of $40 billion to $44 billion. It cited delays in deliveries of semiconductor equipment, which ironically stem in part from chip shortages.
Meanwhile, South Korean chipmaker SK Hynix has indefinitely postponed plans for a $3.3 billion expansion of a memory chip plant. The company is concerned about rising costs and a protracted slump in memory-chip demand, Nikkei Asia reported Wednesday.
Late last month, industry peer Micron Technology (MU) said it had lowered its capex plans amid weakening demand for consumer PCs and smartphones.
And Samsung Electronics also has hit the brakes on capital spending for its chip plants.
ASML Leads Q2 Reports For Chip Gear Stocks
Wall Street analysts expect more reductions in semiconductor equipment spending plans as second-quarter earnings season continues.
On July 20, chip gear maker ASML (ASML) lowered its full-year sales growth target to about 10% from 20%. It said the revision is the result of delayed revenue recognition under its fast shipment program rather than reduced demand. However, it also faces continued supply constraints for certain components needed to build its advanced lithography systems.
Semiconductor stocks have sold off this year over concerns that the chip cycle might soon enter a downturn. Declining consumer spending on personal computers, smartphones and consumer electronics has impacted chipmakers exposed to those segments.
Semiconductor Equipment Firms Can Weather Downturn
In a report Wednesday, CFRA Research analyst Keven Young said semiconductor equipment companies are well positioned to weather any downturn in chip demand due to strong orders and backlogs.
He rates Applied Materials (AMAT) and KLA (KLAC) as strong buys and has a regular buy rating on Lam Research (LRCX).
“Semiconductor equipment valuations sit below Covid-19 (pandemic) lows and well below historical averages,” Young said. “The compression in chip equipment valuations has been brought on by the decline in the overall market and the pricing-in of a rollover in overall semiconductor demand.”
He added, “We expect capital expenditure plans to remain for 2022 and see the potential for a slight downtick in 2023 plans. However, given the elevated backlogs and increased visibility for semiconductor equipment, we do not see much downside to revenue estimates through 2023.”
Major Chipmakers Have Large Capex Plans
Semiconductor equipment stocks historically have bottomed at the beginning of chip cycle downturns, Young said.
“We remain relatively unconcerned about incremental cuts to capital expenditure guidance from large semiconductor customers,” Young said.
Major chipmakers Taiwan Semiconductor, Samsung and Intel (INTC) have massive capex spending plans for the next several years. They plan to upgrade existing facilities to the latest gear and add new production capacity.
Plus, U.S. government funding for the CHIPS Act will fuel expansion of domestic chipmaking capabilities, analysts say. Governments in Europe and China also are supporting chip manufacturing initiatives.
In a report Tuesday, BofA Securities analyst Vivek Arya said he expects Intel and possibly Texas Instruments (TXN) to follow peers and announce delayed capex plans.
Semiconductor Equipment: Negative Sentiment
“Despite near-term concerns, upside from long-term public investment and growing chip complexity should support long-run WFE (wafer fabrication equipment) expansion,” Arya said.
Arya says KLA is his “top pick” among semiconductor equipment stocks. He has buy ratings on Applied Materials, KLA, Lam Research and Nova (NVMI).
A cyclical correction in semiconductor demand and a resulting reduction in capex by chipmakers are already “well embedded in sentiment” as second-quarter earnings season gets underway, Wells Fargo analyst Joe Quatrochi said in a note to clients.
Investors are likely to view cuts to semiconductor equipment spending expectations constructively as the market forms a bottom, he said. He named ASML and KLA as “top picks” in the sector.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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