With chipmakers planning to build more factories amid continued shortages of semiconductors, these times were supposed to be boom times for semiconductor equipment inventories. But chip gear maker stocks are facing headwinds as some chip makers have cut their capital spending plans.




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Semiconductor manufacturing in Taiwan (TSM), the world’s largest contract chipmaker, on July 14 cut its 2022 capital spending target to the bottom of its forecast range of $40 billion to $44 billion. He cited delays in shipments 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 factory. The company is concerned about rising costs and a prolonged decline in demand for memory chips, Nikkei Asia reported on Wednesday.

Late last month, an industry peer Micron Technology (MU) said it scaled back its investment plans amid weaker demand for consumer PCs and smartphones.

And Samsung Electronics has also curbed capital spending for its chip factories.

ASML Leads Second Quarter Reports for Chip Equipment Inventories

Wall Street analysts expect more cuts to semiconductor equipment spending plans as the second-quarter earnings season continues.

July 20, chip gear maker ASML (ASML) lowered its full-year sales growth target to around 10% from 20%. It said the revision is the result of late revenue recognition under its fast shipping 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 on fears the chip cycle could soon enter a downturn. Lower consumer spending on personal computers, smartphones and consumer electronics has impacted chipmakers exposed to these segments.

Semiconductor equipment companies can weather the slowdown

In a report on Wednesday, CFRA Research analyst Keven Young said semiconductor equipment companies are well positioned to weather any slowdown in chip demand due to orders and backlogs. important orders.

He evaluates Applied materials (AMAT) and KLA (KLAC) like strong buys and has a regular buy rating on Search Lam (LRCX).

“Semiconductor equipment valuations are below Covid-19 (pandemic) lows and well below historical averages,” Young said. “The compression in chip equipment valuations was driven by the decline in the overall market and factoring in a roll in global demand for semiconductors.”

He added: “We expect capital expenditure plans to remain for 2022 and see the potential for a slight decline in plans for 2023. However, given the high backlogs and increased visibility for semi- drivers, we don’t see a lot of downside in revenue estimates through 2023.”

Major chipmakers have big investment plans

Semiconductor equipment inventories hit historic lows at the onset of chip cycle downturns, Young said.

“We remain relatively indifferent to gradual reductions in capital expenditure forecasts by large semiconductor customers,” Young said.

Major chip makers Taiwan Semiconductor, Samsung and Intel (INTC) have massive capital expenditure plans for the next few years. They plan to upgrade existing facilities with the latest equipment and add new production capacity.

Additionally, US government funding for the CHIPS Act will fuel the expansion of domestic chipmaking capabilities, analysts say. Governments in Europe and China are also supporting chipmaking initiatives.

In a report on Tuesday, BofA Securities analyst Vivek Arya said he expects Intel and possibly Texas Instruments (TXN) to follow its peers and announce delayed investment plans.

Semiconductor equipment: Negative sentiment

“Despite short-term concerns, rising long-term government investment and increasing chip complexity should support the long-term expansion of WFE (wafer fabrication equipment),” Arya said.

Arya says KLA is her “first choice” among semiconductor equipment stocks. It has buy ratings on Applied Materials, KLA, Lam Research and Nova (NVMI).

A cyclical correction in demand for semiconductors and a resulting reduction in investment by chipmakers are already “well entrenched in sentiment” as the second-quarter earnings season begins, the Wells Fargo analyst said. , Joe Quatrochi, in a note to clients.

Investors are likely to view reductions in expectations for semiconductor equipment spending constructively as the market bottoms out, he said. He named ASML and KLA as “top picks” in the industry.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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