Semiconductor Equipment Stocks - What's Going On?

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Includes: AMAT, ASMIY, ASML, FTXL, KLAC, LRCX, PSI, SMH, SOXL, SOXS, SOXX, SSG, TER, USD, XSD, XTH
by: Robert Castellano

Summary

Year-on-year, semiconductor equipment growth has reached 50%, but continued hyper growth may be unsustainable based on chip growth.

Following a huge run-up in equipment stocks and their recent pullback, the specter of further pullbacks could come with a drop in revenues in 2H 2017.

Q3 guidance for equipment stocks averages 3% QoQ compared to Q2 revenue growth of 8% QoQ.

I’ve been very concerned about the semiconductor equipment industry for some time now, which I detailed in a June 12, 2017 Seeking Alpha article entitled Semiconductor Equipment: Supercycle Or Bubble?

In the article, I noted that the dramatic growth in semiconductor equipment revenues since March 2016 was reminiscent of a bubble in revenues in the 1999-2000 period. I noted:

“The semiconductor equipment growth cycle that began on March 2016 and continues to April 2017 grew from $1.2 billion to $2.2 billion, a growth of 81.6%. This growth is significantly greater than the average annual growth of 0.38% per year."

And most importantly:

“In my opinion, semiconductor equipment revenues are in a bubble, which I call "Bubble 2." Investors should be prepared for a sudden drop in revenues, which would be directly reflected in stock prices going forward.”

The chart below is an update of the chart in the above article to present time.

Table 1 below compares the meteoric rise in semiconductor equipment of 1999-2000, which I call Bubble 1, and the current meteoric rise, which I call Bubble 2.

Table 1 - Comparison of Billing Cycles in Bubbles

Bubble 1 - First 15 months

Bubble 1 - 21 month lifetime

Bubble 2 - First 15 months

Dates

Feb '98 - May '00

Feb '98 - Oct '00

Mar '16 - Apr '17

Low point in billings

$845 million

$845 million

$1.20 billion

High point in billings

$2.16 billion

$2.58 billion

$2.17 billion

Difference

$1.32 billion

$1.73 billion

$970 million

% increase low to high

155.4%

205.3%

91.1%

Source: The Information Network

Bubble 1 lasted 21 months, and equipment billings increased 205.3% in that period (middle column). We are now 15 months into Bubble 2 (last column), so I compare growth to the first 15 months of Bubble 1 in the first column.

The percentage increase in Bubble 2 grew modestly compared to the data in the above-mentioned article for the first 13 months (from 80.8% versus 91.1%), while Bubble 1 grew strongly (from 105.0% versus 155.4%).

Semiconductor billings for June 2017 was $2.29 billion. The billings figure is 0.8% higher than the final May 2017 level of $2.27 billion, and is 33.4 percent higher than the June 2016. The modest growth in equipment revenues is illustrated in the chart below.

This raises two questions:

  1. Is the modest growth shown for June (latest data available) a seasonal flattening, mirroring what happened in 2015 and 2016?
  2. What will happen in September, since revenues dropped in both years in September?

To help answer those questions let’s take a look at CY Q3 growth outlook by equipment companies. The table below shows revenues for major public semiconductor equipment companies that have announced CY2017 Q3 revenues. Note that these revenues are in the currency of the company to eliminate any currency conversions. Also, revenues are for semiconductor equipment sectors only for a company, and exclude non-semiconductor businesses from Tokyo Electron (OTCPK:TOELY) and Hitachi High Technologies.

Q1 CY 2017 revenue growth averaged about 7% QoQ. Revenues increased on average to about 8% QoQ for Q2 CY 2017. Utilizing guidance from each of these companies, revenue growth for Q3 2017 will average about 3% QoQ.

Table 2 – QoQ Revenues

CY 2016

Q4

CY2017

Q1

%

Change

CY2017

Q2

%

Change

Q3

Outlook

%

Change

Currency

Lam

(LRCX)

1,882

2,154

14.5%

2,345

8.9%

2,450

4.5%

1M $

KLA-Tencor

(KLAC)

878

911

3.8%

939

3.1%

985

4.9%

1M $

TEL

179

244

35.8%

222

-8.9%

229

3.2%

1B Yen

Hitachi

High Tech

347

326

-6.1%

381

16.9%

323

-15.2%

100M Yen

ASM Int.

(OTCQX:ASMIY)

173

145

-16.3%

202

39.8%

180

-10.9%

1M Euro

ASML

(ASML)

1,907

1,944

1.9%

2,101

8.1%

2,200

4.7%

1M Euro

Source: The Information Network

According to industry consortium SEMI, through the first half of the year, 2017 equipment billings were up 50% YoY. SEMI, in May 2017, forecast growth would be 12% for 2017. The Information Network’s report “Global Semiconductor Equipment: Markets, Market Shares, Market Forecasts” forecasts growth will be 20% for 2017.

Based on 1H 2017 billings, which are 50% up YoY, billings would have to drop 36.4% in 2H 2017 for total 2017 revenues to increase 12%, based on SEMI’s forecast. Up 50% in 1H and down 36.4% in 2H to me would signal a crash, which would then be a replication of the 1999-2000 Bubble 1.

On the other hand, billings would have to drop only 10.1% in 2H 2017 for total 2017 revenues to increase 20%, based on The Information Network’s forecast. That would indicate a soft landing to the current semiconductor equipment bubble.

What about stocks? I believe investors are starting to get worried that the salad days may be over for the semiconductor equipment stocks, and any negative news or missed earnings has and will have an impact on the sector as a whole. Semiconductor equipment stocks have grown strongly in 2017. Lam Research grew 57% between January 1 to July 26, but has pulled back 6.5% in the past week. But because, Teradyne’s (TER) bookings disappointed analysts, stocks of bellwether equipment companies dropped in tandem in attrition to TER. Despite a positive report from LRCX, its stock was down 4%. Shares of Applied Materials (AMAT) were also down, and KLAC was down 1.6%.

Investor takeaway

Revenue growth is dropping for semiconductor equipment companies, based on CY 3Q guidance from company CEOs. At the same time, revenue growth is arguably approaching a bubble.

Equipment stocks have become sensitive of late to negative news coming from peers. Any slowdown in earnings or from capex cutbacks from semiconductor manufacturers will also affect equipment stocks. Since we are in the middle of CY 2Q earnings reports, I expect a bumpy ride for equipment stocks. The next major reset may come next month when AMAT reports.

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.

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