Lam Research Rises In Semiconductor Etch Sector On Heels Of 3D NAND Memory
Summary
- The complexity of 3D NAND chip production was responsible for large revenue growth of processing equipment manufacturers in 2017 that will continue in to 2018.
- In the plasma etch sector, Lam Research gained market share against its main competitor Japan's Tokyo Electron.
- Lam Research's market share rose to the mid-50% range, and that share is expected to increase based on the company's technological achievements.
3D NAND Etch Background
Shown in Chart 1 is a schematic of a 3D NAND structure and the types of equipment used in creating the structure. 3D NAND scaling utilizes a combination of deposition and etch processes to define complex 3D structures with extremely high aspect ratio (HAR) features.
Chart 1
The HAR channel etch tool must drill tiny circular holes or channels from the top of the device stack to the bottom substrate. It is critical to achieving uniform hole size through multiple layers to define the channel of memory cells. More than a trillion holes must be etched simultaneously and uniformly on every wafer, each with an aspect ratio of 40:1 for 32- and 48-layer devices with 64 layers moving to 60:1. For comparison, the highest aspect ratio structure that's etched in planar 2D NAND is less than 15:1. The HAR etch is illustrated on the left side of Chart 1, using a dielectric etch process.
The staircase etch step, shown on the lower part of Chart 1, creates the individual contact pads for each memory cell within the layers. A highly controlled etch process is used to define the size of each contact pad. Repeated vertical etch and lateral trim etch processes are adopted to form the staircase.
Materials to create a stack of layers are customer dependent - Samsung (OTCPK:SSNLF) deposits alternating layers of silicon nitride and silicon dioxide on the substrate, while uses alternating layers of conductive polysilicon and insulating silicon dioxide. Thus, etch equipment needs to be versatile with process recipes to meet the needs of individual customers.
NAND Market
The market for semiconductor process equipment for 3D NAND production is huge. Below is a chart from Lam Research’s (NASDAQ:LRCX) 2018 Investor Presentation. My interpretation of this chart for WFE (wafer front end) is that revenues generated in the move from 2D NAND in 2007 to 3D NAND in 2018 are 2 1/2 times greater. The primary growth factor is in the numerous deposition-etch processes as was shown in Chart 1.
Chart 2
Driving the growth in WFE equipment is the growth in 3D NAND. Shown in Table 1 below is 3D NAND output by company. Data is extracted from The Information Network’s report entitled “The Hard Disk Drive (HDD) and Solid State Drive (SSD) Industries: Market Analysis And Processing Trends.
Between 4Q 2016 and 4Q 2017, 3D wafer production increased 171%, from 231,000 wafers per month to 625,000 per month.
The growth in 3D NAND device production is directly related to the amount of processing equipment. Revenues for the top seven semiconductor equipment companies grew 39.3% in 2017 on sales to the DRAM and NAND memory sector, which grew 60%.
LRCX, in the same investor presentation, reported that its share of the etch market was in the mid 50%, as shown below in Chart 3.
Chart 3
According to our report entitled “Plasma etching: Market Analysis and Strategic Issues,” Lam Research’s market share has indeed reach the mid-50% share, as show in Chart 4.
Market share for LRCX increased from the mid-40% share in 2012 to mid-50% share in 2017, in concert with Lam Research's analysis. Market share increased at the expense of Japan’s Tokyo Electron Limited, whose market share decreased from 30% in 2012 to 20% in 2017. Applied Materials (AMAT) was in third place with market share less than 20%.
Chart 4
Investor Takeaway
There are two key criteria to consider LRCX as the dominant equipment supplier for 3D NAND memory sales. The first is market share, and I described the importance of market share growth in my February 5, 2018, Seeking Alpha article entitled “Sizeable Changes In Semiconductor Equipment Market Share In 2017.”
The second is customer base. Shown below in Chart 5 are customers of Lam Research.
Chart 5
If we compare Chart 5 with Table 1, the 3D NAND manufacturers Micron Technology (MU), Intel (INTC), Toshiba, SK Hynix, and Samsung Electronics are all customers of LRCX.
In future articles I will go into more depth on the deposition equipment market shares as well as 3D NAND output forecasts.
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.
This article was written by
Robert Castellano has 38 years of experience analyzing the semiconductor markets.
He runs the investing group Semiconductor Deep Dive. It provides investors with recommendations for stocks with the greatest near- and medium-term growth potential. Members receive detailed analysis and research tools to make investments in semiconductor and tech stocks. Learn more.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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (34)
AMAT compete in many more of the major sectors of the semiconductor equipment market than LRCX, which only competes in etch, deposition, and clean, whereas KLAC competes in only process control (inspection/metrology). AMAT also sells into the display sector outside semiconductors.
Now within the semiconductor industry going head-to-head, LRCX competes against AMAT in etch (subject of the article) and deposition. LRCX got into the deposition market with the acquisition of Novellus, dropped out of the PVD business and started developing ALD equipment. But AMAT recently entered the ALD market but is smaller than LRCX. They compete strongly in PECVD, and non-tube CVD. LRCX is smaller but ha greater growth in 2017 against AMAT.
If we look at the application where AMAT and LRCX compete in the etch and deposition sectors it is clearly 3D NAND and also DRAM. The large growth in the memory business was a strong driver in the large growth in the equipment market last year. So, a rising tide raised all boats. Since LRCX gained market share in the 5 segments it competes against AMAT (dielectric etch, conductor etch, PECVD, LPCVD, and ALD), clearly it has best-of-breed equipment and has a strong foothold in all memory companies. And since the memory sector is forecast to be the strongest sector in 2018, that bodes well for LRCX, meaning that it should continue its market share growth in 2018. Keep in mind that a great deal of equipment was purchased in 2017, and because of overshoots in one year that are responsible for the up and down cycles of equipment purchases, growth will be no where as strong as 2018. This is when market share growth becomes important because there is no rising tide. In 2019 I see a correction in the equipment market so that revenue growth will be negative 10% over 2018. DRAM memory markets will be strong, but primarily coming from new Chinese companies, so the slate is cleaned in moving to different, new customers.
So in the real world, LRCX has a clear advantage. However, main street is very different from wall street, and here's where AMAT has an advantage. I've describe these in above comments, namely its stock buybacks, expertise in hype, and business relationship with Gartner which has a strong influence in the investor community, yes those same people who put a buy, sell, or hold on a stock. In the hype realm, go back and read earnings call statements and one would think that AMAT just invented the best mousetrap and wrote a best-selling novel. Then look at how they performed, when you start reading my articles on market share gains against competitors (not only LRCX but ACLS). Yet its stock has rocketed, increasing 60% in the past year.
Given these factors, the better play may be a toss-up. I don't promote any stock over another. I try to separate the hype from reality in my articles and call a spade a spade.
In your views - currently which is a better play among these: AMAT LRCX KLAC? Thanks
One of the points I try to make to readers of my SA articles is to call the hype coming out of AMAT. I wrote an article about that topic back on May 21, 2014 in an article entitled "What Applied Materials Didn't Say That Made Its Stock Pop. "https://seekingalpha.c...
In essence, LRCX gave an earnings call and said it was experiencing push outs in equipment installs because of the down industry. AMAT gave their earnings call a month later and never used the term push out, even though it was experiencing them, and as I have shown in my recent articles, was losing market share to LRCX. When LRCX had used the term, its stock plummeted. When AMAT did not use the term, its stock popped.
Another example as to how AMAT is primarily concerned about stock values (keep in mind management's salaries are chump change compared to their stock options) is that AMAT has a "business relationship" (I've been told that directly by a VP there) with Gartner, and gives Gartner it revenue by type of equipment. Gartner is the only company that gets it. Why? Take a look at all the analyst notes and you will see Gartner as the source reference to all semiconductor charts. So, Gartner gives these sell-side analysts their market share info and they then stick it in their reports and notes. Therefore, these analysts primarily rely on Gartner for their data source. Whatever Gartner supplies them regarding market share for AMAT and competitors gets put in analyst reports. Since Gartner is the only company that gets these numbers, there is no way to validate them, and as a result they are suspect. So, every analyst report is suspect. What this "business relationship" is I don't know, but if AMAT was upfront, they would give that info to everyone who asks. Instead, only Gartner gets it.
The dividend increase and stock buyback both say that this time things are different and here’s the cash to prove it.
