Why Semiconductor Equipment Stocks Rallied Today

On Thursday, shares of major semiconductor equipment companies saw significant gains. Applied Materials (AMAT) rose by 4.5%, while Lam Research (LRCX) increased by 4%, and KLA Corporation (KLAC) gained 4.3%.

These three companies represent a substantial portion of the semiconductor equipment market. They generally deliver strong long-term returns, although recent months have been tough. Each company’s stock is down between 20% and 32% from their peaks in the summer.

The question now is whether this decline is coming to an end. The rally can be attributed to the earnings report from Taiwan Semiconductor Manufacturing (TSM), which was released on Thursday. TSMC forecasted capital spending that exceeded market expectations for the upcoming year, signaling confidence in a significant growth cycle over the next five years.

TSMC's Planned Investments

TSMC stands out as the leading manufacturer in the semiconductor sector. As other chip makers strive to compete, TSMC maintains a near-monopoly on cutting-edge semiconductor production. This company plays a vital role in supporting major chip designers such as Nvidia and Apple.

While many of these companies also generate revenue from memory products, a significant share of their logic revenue is tied to TSMC. Stocks in the industry had been slipping since the summer as investors questioned the durability of growth driven by artificial intelligence (AI). Additionally, sales in non-AI semiconductor markets, like PCs and smartphones, have been somewhat sluggish.

However, TSMC's optimistic outlook has likely eased those concerns. The company's management now predicts roughly a 20% compound annual growth rate (CAGR) for revenue over the next five years, covering the period from 2025 to 2029. Notably, TSMC anticipates an even more robust mid-40% CAGR for AI accelerators. In fact, it expects that AI chips will make up nearly a mid-teens percentage of total revenue in 2024, increasing significantly thereafter.

This anticipated growth will drive demand for new semiconductor equipment. TSMC estimates that its capital expenditures will rise significantly in the coming year, ranging from $38 billion to $42 billion. This marks a notable increase of 33% from the amount spent in 2024 and surpasses the previous peak of $36.3 billion recorded in 2022.

This substantial uptick in capital expenditure is promising for Applied Materials, Lam Research, and KLA Corporation. Both Applied and Lam specialize in crucial etching and deposition equipment, which are essential for layering and removing materials used in transistors. With the shift to gate-all-around transistors scheduled for this year, along with new backside power delivery technologies likely emerging in 2026, both companies are poised to expand their market opportunities as these innovations will require intricate etching and deposition processes.

Moreover, the meticulous nature of these manufacturing processes necessitates careful defect measurement at each step. KLA, as a leader in metrology and process control equipment, stands to benefit from TSMC's spending strategy.

Long-term Investment Perspective on Semiconductor Equipment Stocks

Investors looking for long-term assets may find that these semiconductor equipment companies are solid buy-and-hold candidates. They are closely tied to the evolving semiconductor industry, which is expected to grow at a rate above GDP for the foreseeable future. Additionally, these firms are known for their profitability and their generous returns of cash to shareholders.

However, volatility can be a concern. These stocks have seen declines of 20% to 30% from their high points, and the semiconductor sector hasn’t even hit a customary bear market phase.

Despite this cyclical nature, the semiconductor industry is likely to keep innovating and reaching new heights. For investors prepared for potential drawdowns of 40% or more, these stocks are worth considering during downturns. Thursday's strong performance marks a positive shift following a six-month period of decline.

semiconductor, stocks, investment