Semiconductor Equipment – Fountainheadinvesting

Comment made on the SA article.

ASML – Lithography, Monopoly in EUV machines, each machine costs north of $200 Mn, absolutely vital for lower node semis like 3nm, which is powering the latest I-phone among others.

ASML is at the pole position since it’s a critical component for AI and/or high-end chips. Every chip being planned or in production for AI acceleration or incorporating AI acceleration is produced on a 5 nm or smaller node that requires EUV

They also have the lower-end D-EUV machines, which are also successful.

Here’s a good link to the equipment technology market.

https://www.yolegroup.com/strategy-insights/semiconductor-equipment-market-share-reshuffles-amid-memory-demand-decline

Lam Research on the other hand is strong in Etch and Deposition, which is exposed to cyclicality because it’s more of a mass market commodity with competition for AMAT, KLAC, and Tokyo Electronics. But the pickup from customers like Micron, which itself is riding the AI boom for high-grade memory equipment is a big benefit for Lam. To me the biggest strength is the resilience in the last 10 years with an EPS CAGR of 28% – that is a huge deal, cyclicals/commodity producers never get that.

Teradyne’s guidance was a big disappointment – they’re forecasting zero growth for 2024, mainly because the first two quarters will be lower but growth will pick up in Q3, Q4. Consensus estimates were for 10% growth in 2024.

Even as end clients like Cloud Service Providers and hyperscalers have bought more semiconductors in the last 6 months, capacity utilization of Teradyne’s testing equipment is still low and new buying of equipment will not be triggered till capacity is used up. This isn’t always a linear relationship, and often there are lags. Second – mobile and PC’s markets have also not increased demand and Teradyne will not get visibility till April for mobile phones demand (read Apple via TSM, which is their largest customer).

Management believes that there is little downside left, and they see utilization rates improving and unit growth in PC’s and smartphones could be a tailwind in the second half. They are still maintaining 2026 estimates of $4.3Mn and over $6 in EPS, but they have a lot of catching up to do.

Contrast this with closest competitor, Advantest (ATEYY), which surprised this morning and increased guidance by 2-3% for the next quarter.. They’re expecting a great second half as well.

I have more Advantest than Teradyne and it’s also done much better for me. If things don’t improve at Teradyne I may just focus on Advantest.