Chip Supply Crunch sees Chip Machinery Makers emerge as biggest Winners

Another of the coronavirus pandemic-related aftereffects included the sudden shortage of semiconductors that disrupted automotive production and limited revenue growth for Apple Inc, however, it has created a stock market boon for the makers of chip production equipment.

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The supply crunch has seen companies who make chip production equipment emerge as the biggest winners as chipmakers rush to add more factory capacity. Applied Materials Inc., the world’s biggest equipment maker, is the best performer in a semiconductor index as its shares advance 36% this year. More than 19% gain has been seen by Brooks Automation Inc., Lam Research Corp., and KLA Corp. each, nearly twice the gain in the Philadelphia semiconductor index. Amid a broad technology slump following a two-day rally, the stocks fell on Tuesday.

Applied Materials has more than tripled gains in the Philadelphia semiconductor index
Applied Materials has more than tripled gains in the Philadelphia semiconductor index. Image: Bloomberg

Wall Street has been provided with increasing confidence that the rally has staying power due to the expanding equipment budgets by major chipmakers and governments concerned about foreign dominance of production facilities.

“Over the next three to five years, this is definitely very bullish for semi cap equipment in terms of overall tightness and focus on domestic supply,” said Krish Sankar, an analyst with Cowen & Co, according to Bloomberg.

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A year ago, this shortfall seemed an unthinkable issue when a rapidly spreading Covid-19 virus sent economic activity plummeting. Companies began efforts to reduce production in anticipation of ebbing sales. Instead, after an initial shock, sales surged in many industries surged and companies were in shambles trying to boost inventories. Many chipmakers are now putting their factory production at maximum capacity and governments are suddenly looking at a dearth of homegrown plants as a national security risk.

Supply Crunch

After the supply crunch was brought to the notice of the U.S. administration by the automakers of the country, President Joe Biden signed an executive order last week to review the country’s supply chains for semiconductors and other products. While quick fixes aren’t expected to be, 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 Company (TSMC), the largest chipmaker in the world, which produces chips for Apple and Broadcom Inc., plans to spend $12 billion to construct a plant in Arizona. A rally in chip-related stocks around the world was seen in January as TSMC included some of the costs for that facility in the company’s capital spending plans for 2021. Broadcom’s capital outlays could total as much as $28 billion, up from $17 billion in 2020.

Huge manufacturers like TSMC building smaller plants in new regions create particularly attractive opportunities for Applied Materials, CEO 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 MKS Instruments Inc. and Lam Research.

“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.”

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