What Investment Opportunities Emerge as AI Requires More Chip Factories?

TipsForTraders | June 11, 2024

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The global semiconductor industry is witnessing an unprecedented expansion, marked by a flurry of activity in the construction of chip factories across multiple continents. With artificial intelligence increasing demand for advanced processors and memory chips, substantial groundwork is underway in regions including America, Asia, and Europe. This movement is supported by significant financial pledges from both government and industry, amounting to tens of billions of dollars. Leading semiconductor equipment manufacturers such as Applied Materials, Lam Research, and ASML Holding are experiencing a bullish market sentiment, with investors rallying behind these companies in anticipation of the new wave of semiconductor capital equipment needs.

Mark Miller of Benchmark Company has projected an impressive 18% growth in orders for semiconductor capital equipment (semicap) by 2025, pushing the market to a potential $110 billion. This forecast extends potential gains to smaller players in the sector, including chip-packaging specialists like Nova and Onto Innovation, and wafer-processing companies such as Veeco Instruments, Advanced Energy Industries, MKS Instruments, and ACM Research. Miller remains bullish on these stocks, reaffirming his buy recommendations in a recent industry note.

Particularly noteworthy is the situation in China, where 32 new chip factories are currently being constructed. Historically, China has accounted for a significant portion of the semicap industry’s sales. However, recent U.S. restrictions on the sale of advanced chip-making equipment have prompted a rapid development of local semicap capabilities. ACM Research, which reported 90% of its recent sales in China, is actively diversifying its market reach to include the U.S., Korea, and Europe in response to these restrictions.

The demand is not limited to one region. Applied Materials and Lam Research, leaders in the semiconductor equipment space, derive around 40% of their recent orders from China. This robust demand is expected to benefit their key suppliers like Advanced Energy and MKS Instruments. Predictions from industry analysts suggest a potential rise in the shares of Advanced Energy to $117, up from $108, and MKS Instruments to $142, up from $129.

AI technologies are driving an increased need for memory chips, which are not only more numerous but also advanced in design to manage higher bandwidths. This demand for high-bandwidth memory chips has benefitted companies such as Nova, Onto Innovation, and Veeco, which specialize in the necessary equipment for these sophisticated packaging solutions.

The continuous push towards denser integration of transistors in chips for next-generation servers and PCs necessitates cutting-edge semiconductor technologies and novel packaging approaches. This evolution is set to propel business for companies like Nova and Onto Innovation. Nova’s stock price has recently surpassed Miller’s price target, reaching $219, while Onto is expected to climb from $216 to $230.

In conclusion, as the semiconductor industry races to meet the evolving demands of artificial intelligence and high-performance computing, the landscape is ripe with opportunities. Investors and industry stakeholders are closely monitoring these developments, with a keen eye on emerging players and established giants alike, positioning themselves strategically in a dynamic market set for substantial growth. This expansion not only reflects the technological advancements but also highlights the critical economic stakes involved in global semiconductor production.