Semiconductor Equipment Hyper Growth Heading Into Semicon West Trade Show

Summary

• Semicon West, the key trade show for semiconductor equipment sellers and buyers, starts this week in San Francisco.
• Analysts have upped stock valuations on leading equipment manufacturers, which has raised stock prices for the entire sector.
• Year-on-year, semiconductor equipment growth has reached 55%, but continued hyper growth may be unsustainable based on chip growth.

A July 7, 2017 Investor Business Daily Headline noted:

“Two Chip-Gear Stocks Soar On Bullish Report Ahead Of Big Conference”

The article goes on to report:

“Morgan Stanley raised its price targets on two major chip-gear stocks on Friday ahead of Semicon West, a semiconductor capital equipment conference that will run July 11-13 in San Francisco. Morgan Stanley analyst Joseph Moore reiterated his overweight ratings on Applied Materials (AMAT) and Lam Research (LRCX). He increased his price target on Applied Materials to 52 from 47 and upped his target on Lam to 168 from 135.”

As a result, Applied Materials was up 3.4% to close at 43.54 on the stock market on July 7 while Lam finished 3% to 148.13.

Analyst Moore goes further to expound on his argument by stating:

“Applied Materials and other chip-gear firms at Semicon West are likely to show increased confidence in the longer term prospects for the industry.”

Was he right? Definitely not – on two counts. While Semicon West is the largest semiconductor equipment trade show and will start July 11, 2017, both Applied Materials and Lam Research are not among the list of exhibitors.

More importantly there is no correlation between business improvement and Semicon West. I’ve plotted equipment billings from 2010 through 2016 and compare it to Semicon West dates in the chart below. The billings data come from SEMI, the industry consortium that is the organizer of Semicon West, which stopped supplying billings data in January 2017.

As shown in the chart, billings basically decrease in the months following Semcon West, which is held in early July of each year.

I’ve been attending Semion West since 1982 when it was first held at Bay Meadows in the San Mateo Fairgrounds. In fact, I spoke at several technical programs held as part of the conference. This year I was asked to speak at the Bulls and Bears Session but declined for personal reasons.

But the main point of Semicon is that it has evolved to encompass a wider venue. What was originally Semicon West, Semicon East, Semicon SouthWest, and Semicon Europe has changed and expanded to Semicon China, Semicon Taiwan, Semicon Korea, Semicon Southeast Asia, Semicon Japan, and Semicon Europa. In other words, as the semiconductor industry has expanded to manufacturing centers around the world, SEMI has established conferences in these regions.

On closer inspection of the above chart, billings generally increase each year following Semicon Taiwan, which is held yearly in the middle of September. Thus, it may be a better leading indicator of the semiconductor industry instead of Semicon West.

The semiconductor equipment bubble is getting bigger

According to the IBD article, The Morgan Stanly analyst raised valuations for both AMAT and LRCX, causing both stocks to increase and other equipment stocks to rise in tandem. The analyst cited continuous improvement in memory sales and the transition from LCD to OLED displays for smartphones. The Morgan Stanley analyst is not alone among analysts who continue to increase valuations on equipment stock citing growth of the memory market.

Stock valuations for the equipment companies are based on earnings, which is different from equipment revenues, which I suggested in a June 12, 2017, Seeking Alpha article entitled “Semiconductor Equipment: Supercycle Or Bubble?” In the article I presented my analysis of the equipment bubble by comparing it to the equipment bubble in 1999-2000. In this update, I’ll add more data to substantiate my thesis.

The chart below is an update of the chart in the above article and shows continued growth in the semiconductor equipment market (blue line) for billings collected through May 2017.

Based on data From January through May, billings for semiconductor equipment have increased 55.0% compared to only 18.4% for the overall semiconductor market, as shown in the table below. Billings for semiconductor equipment are provided by SEMI, while billings for semiconductors are provided by The Semiconductor Industry Association.

Table 1
Billings ($Millions)	Jan-May 2016	Jan-May 2017	% Change
Semiconductor Equipment	$6,684.9	$10,360.6	55.0%
Semiconductors	$131,061,568	$155,226,329	18.4%
Source: The Information Network (www.theinformationnet.com)

Click to enlarge

Clearly, much of the 18.4% growth in the overall semiconductor market came from the memory market, as shown in Table 2, which grew an average of 58% YoY.

Table 2

Source: RBC Capital Markets

DRAM and NAND revenue growth in 2017 is largely attributed to increased average selling prices (ASPs) brought on by lack of DRAM investment in 2016, difficult transitions from 2D to 3D NAND, and difficulty in migration to 1xnm DRAM. I noted these issues in a July 7, 2017, Seeking Alpha article entitled “Micron (MU) May Or May Not Have Had DRAM Production Issues, But It's Creating A Dilemma For Investors.”

Semiconductor equipment purchases are made for three reasons:

1. Outfit a new fab shell
2. Technology purchases as a fab line moves to a new technology node, and the equipment replaces equipment that reached its resolution limit
3. Capacity purchases to increase the number of chips needed to be made at the same technology node

In the memory market, we see all three types of purchases. Each type of purchase will increase the amount of chips manufactured. But to varying degrees. At one extreme, technology purchases, chip yields drop dramatically for a period of time and then ramp up. On the other extreme, capacity purchases, chip yields will be high to begin with because the same equipment type and process will be used to increase wafer starts. In the middle, outfitting a new fab is variable and difficult to access.

For memory devices for 2017, for example, new equipment was installed at Samsung Electric’s (OTC:SSNLF) in Pyeongtaek, South Korea, SK Hynix’ upper floor of its M14 facility at Icheon, South Korea, and 3D NAND conversion at Toshiba/Western Digital’s (WDC) Fab 5 to 3D NAND in Yokkaichi, Japan.

Equipment Spend Forecast

Semiconductor equipment revenues year to date have exceeded forecasts:

• Gartner in April 2017 forecast semiconductor equipment growth would be 9% for 2017
• SEMI in May 2017 forecast growth would be 12% for 2017
• Our report “Global Semiconductor Equipment: Markets, Market Shares, Market Forecasts” forecasts growth will be 20% for 2017

Unit shipments of semiconductors are different than revenues.

Data in March 2017 from market researcher IC Insights show that annual total semiconductor unit shipments will increase from 868.8 billion in 2016 to 950 billion in 2017, as shown in the chart below. This represents a unit growth of 9.3%. Already, as shown in Table 1 above, revenue growth is 18.4%.

Investor Takeaway

The chart below shows the incredible billing growth of semiconductor equipment stocks for 2017, an uptrend that started in December, 2016. The question remains how sustainable is this growth.

Semiconductor equipment billing growth of 55.0% YoY through May 2017 compares to only 18.4% billing growth in semiconductors. If we consider unit shipments of semiconductors instead of billings, growth is forecast to reach only 9.3% for the entire year.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.