The good days of chip equipment are over

Latest update time：2024-10-18

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Source: Content compiled from WSJ, thank you.

Demand for artificial intelligence chips is booming. Unfortunately for the people who make the equipment that makes semiconductors, that's not enough.

That contradiction became acutely apparent this week. Taiwan Semiconductor Manufacturing Co. 2330 -0.96% decreased; red downward triangle reported strong third-quarter results on Thursday and said it expects revenue from companies including Nvidia NVDA 0.89% increased; green upward triangle to more than triple its red-hot chip sales this year.

The announcement comes on the heels of a rather bleak earnings report from ASML. The Dutch equipment maker said net orders for the third quarter were 2.6 billion euros ($2.8 billion), less than half of what Wall Street had expected, a major miss for a company that makes the lithography equipment essential for making the most advanced chips. The company also said it expects revenue in 2025 to be at the low end of its previous forecast.

The two competing reports surprised investors. Shares of major U.S. equipment makers Applied Materials AMAT -0.73% Decreased; Red Downward Triangle, Lam Research LRCX -1.35% Decreased; Red Downward Triangle, and KLA KLAC -1.81% Decreased; Red Downward Triangle have fallen between 13% and 18% in two days since ASML unexpectedly reported Tuesday morning, a day earlier than planned. ASML itself has also lost 20% of its value in that period. TSMC’s results gave some boost to chip stocks on Thursday, pushing the PHLX Semiconductor Index up about 2% in early trading.

Analysts still widely expect total global sales of chipmaking equipment to top $100 billion for the first time this year. But the chipmaking industry is dominated by a handful of big-spending companies — TSMC said Thursday that capital spending this year will be just over $30 billion and “very likely” higher next year.

Two other big spenders are also struggling. Intel has been losing market share in data centers and personal computers just as it tries to execute an ambitious turnaround plan, forcing the storied chip giant to cut capital spending to conserve cash. Wall Street expects Intel’s capital spending to fall 8% this year and 15% next year, according to consensus estimates from Visible Alpha.

Samsung apologized to investors last week, acknowledging its missteps. The world's largest memory chip maker has lagged behind rivals in specialized memory needed for artificial intelligence. Analysts expect Samsung's chip-related capital expenditures to fall 4% this year, but are expected to rebound next year to 2023 levels, according to Visible Alpha estimates. Samsung is likely to give a further update on its spending plans later this month when it reports full third-quarter results.

Then there’s China, which has been investing heavily in building its domestic chip industry at a time when the U.S. is trying to limit its access to the most advanced chips and manufacturing equipment. Sales to China historically accounted for 14% to 18% of ASML’s annual system sales, but that jumped to 29% last year and averaged 48% in the first three quarters of this year. Analysts have long worried that this spending surge is unsustainable, and it is.

ASML CEO Christophe Fouquet said on the company's earnings call on Wednesday that "we expect the share of our business in China to return to a more normal level," and that China's business is expected to account for 20% of the company's total revenue next year.

Therefore, investors still need to proceed with caution - no mean feat in a market still dominated by AI hype. TSMC's report on Thursday unsurprisingly further boosted stocks such as Nvidia, Micron Technology MU 2.57% INCREASE; GREEN UPWARD TRIANGLE and Broadcom AVGO 2.66% INCREASE; GREEN UPWARD TRIANGLE which have been directly benefiting from the demand for AI.

But the market is more complex for device makers, whose customers must also deal with slowing PC demand, uneven smartphone sales and a sluggish automotive market. Shares of Applied, Lam and KLA more than doubled between the launch of ChatGPT in late 2022 and July 10 of this year, with all three companies hitting record highs. However, their combined revenue for the past 12 months actually fell 9% over the same period, according to S&P Global Market Intelligence.

Even after this week’s hammering, those stocks’ forward price-to-earnings ratios are still 10% higher than their average over the past five years, according to FactSet.

“The mistake many investors and inexperienced analysts make is to view the huge success of AI as an indicator of the overall chip market,” Robert Mayer of Semiconductor Advisors noted on Wednesday.

Nvidia’s rise won’t benefit all ships equally.

Reference Links

https://www.wsj.com/tech/ai-honeymoon-is-over-for-chip-equipment-industry-eedc0ca5

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