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Applied Materials: SMIC Move To 7nm Node Capability Another Headwind

Summary

  • U.S. sanctions against China's SMIC haven't worked in the last 18 months as SMIC moves to the 7nm node using DUV lithography.
  • Assuming SMIC makes 7nm logic chips instead of 28nm at its new fabs, Applied Materials will generate net revenues of just $14 million.
  • Other equipment suppliers will see a tailwind from SMIC’s transition including Lam Research (+$962 million) and ASML (+$4,128 million).
  • Applied's minimal net gain means further loss of market share to competitors.
  • The net gain in revenues from SMIC will move ASML to the top of the global equipment market in 2022.
  • This idea was discussed in more depth with members of my private investing community, Semiconductor Deep Dive. Learn More »
Silicon wafer and red China-flag background

Rudi_Lange/iStock via Getty Images

Semiconductor Manufacturing International Corporation (SMIC) (OTCQX:SMICY) announced revenue of $1,841.9 million in 1Q22, an increase of 16.6% QoQ from $1,580.1 million in 4Q21, and 66.9% YoY from $1,103.6 million in 1Q21.

Despite COVID lockdowns in China that delayed SMIC's expensive

This free article presents my analysis of this semiconductor/semiconductor equipment sector. A more detailed analysis is available on my Marketplace newsletter site Semiconductor Deep Dive. You can learn more about it here and start a risk free 2 week trial now.

This article was written by

Robert Castellano profile picture
16.26K Followers

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 stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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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Comments (51)

charged profile picture
Feb 2023 amat release First, the Centura Sculpta system promises a simpler, faster and more cost-effective alternative to EUV double patterning. Second, the VeritySEM 10 system precisely measures the dimensions of semiconductor device features patterned with EUV and emerging High-NA EUV lithography. Market seems excited. Have they jumped others ?
Robert Castellano profile picture
@charged The Centura Sculpta got a lot of press, but it was invented by Tokyo Electron several years ago. AMAT doesn't say that.
In the CD SEM business, in 2022 shares Hitachi Hi-Tech has a larger market share. You can buy my Metrology, Inspection, and Process Control report from my web site at www.theinformationnet.com.
Hung Victor profile picture
All Chinese media and social media delete and block SMIC 7nm News and post.
Blkwtrdragon profile picture
www.tomshardware.com/...

China's SMIC Shipping 7nm Chips, Reportedly Copied TSMC's Tech
Robert Castellano profile picture
@Blkwtrdragon You heard it here 2 months ago. Keep reading my articles.
TYB profile picture
TYB
25 Jun. 2022
What is in a node #. The marketing number 14, 10, 7 or 5nm is just a number. What is really more interesting is the SRAM size, as well as the size of the various standard cells and number of fins as well as the height of the library and the number of metal tracks and the true PPAC.

Sure you can do 10, 7 and maybe 5nm with multipatterning at huge impact to the "C" in PPAC. We can look at Intels 10nm as a fine example of not taking the right approach in patterning and the cost of it.

IMHO there is no reason that with some relaxation over overlay that double and triple patterning can't drive scaling for China. It is a misguided strategy to bar certain tools and technology long term, everyone is going to lose as we are currently going.

A far better way forward is an open dialog about a win-win trajectory. Sadly both sides have taken extreme positions that make any attempt at real progress forward difficult to impossible. Someone needs to begin a real dialog but no party is willing.
u
China is destroying all unreasonable and racists sanctions. The best way is cooperation among countries. The perpetrators of these illegal sanctions against China, are now looking very ugly.
charged profile picture
@userpeter court cases for theft make china a mongrel.
r
Hi, @Robert Castellano could you clarify, where in Chart 1 does it show that "SMIC has moved beyond 14nm as shown in Chart 1"?
Robert Castellano profile picture
@readyplayer1 Sorry I think it was a typo when I abridged my Marketplace newsletter and eliminated a low of words and charts for this free article. I have initiated a correction.
SimpleTrader profile picture
Senor Castellano

If possible can you do an article on QUIK. It is a tiny company and analysts have become bullish on the stock. Chart is extremely strong and the stock refuses to go under 5 despite the bloodbath everywhere. Thanks.

November 18, 2021
08:56 EST QUIK
QuickLogic price target raised to $12 from $8 at Roth Capital
Roth Capital analyst Suji Desilva raised the firm's price target on QuickLogic to $12 from $8 and keeps a Buy rating on the shares. The analyst notes QuickLogic reported essentially in-line Q3, reflecting FPGA IP licensing growth coupled with continued product strength. DeSilva believes the strong gross margin level and healthy guidance reflect a breakout opportunity in QuickLogic's fundamentals.

//////////////////////

Here is the link to this week's conference call. Richard Shannon and other analysts were on the call.

seekingalpha.com/...
Robert Castellano profile picture
@SimpleTrader Let me look into it. Keep in mind as I have said several times is that I use these articles as a "calling card" for companies to buy my marketing reports for my company The Information Network (www.theinformationnet.com). This is also a reason I don't own stocks in any company because I want to be objective in my analyses and I read a lot of SA articles with an agenda.
I'm negative on AMAT since this management came in, and I knew from the start it was a management team that came from running a $1 billion company (VSEA) and all of a sudden running a $10 billion company with 20 product lines not just ion implant.
And if you read my articles, they are still over their head, losing market share to competitors nearly every year and had to resort to moving $331 million from 2018 revenues to 2019 total of three times to make 2019 look better.
And here is a company with large amount of revenues that SHOULD be able to make the "best of breed" equipment to GAIN share and they don't, even losing share to some of the smallest semi cap companies, some of which have total revenues less than AMAT's CEO Dickerson makes in a year. And why is that? They can't execute.
S
Time will tell if SMIC has the yield to successfully mass produce anywhere close to demand. Don’t forget Intel had similar issues with its 10nm. Even then the main customer will be Huawei - already sanctioned by the US. I don’t think it will affect Amat/Lam/Asml financials for the foreseeable future anyways - they all are booked solid as is - can’t even fulfill the backlog they have now. The COVID lockdowns will only make the parts shortages worse pushing up more inventory and deferred revenue. GFS and TSM - all booked solid for the next two years as well. Whatever incremental revenue that could be derived from SMIC - well, get in line.

Btw - Robert - can you walk us through how you came up with only $14m benefit for Amat vs nearly a $1B for Lam?
Robert Castellano profile picture
@SMF_USR What I did was use an ASP for dep, etch, implant, clean, and CMP equipment of $5 million each (back of envelope calculation). Then I calculated the demand for units based on a 28nm vs 7nm fab, as part of my database for my consulting company as referenced in the report in the article.
Then I multiplied by the company's market share in each category (it won't lose/gain as much if it has a small share).
For AMAT, its product demand unfortunately drop in going to 7nm while all of Lam's increase.
By the way, for ASML, I used an ASP of $70 million for DUV immersion and lower for non-immersion, and deducted the loss by not selling EUV systems.
H
Nonsense on stilts
Robert Castellano profile picture
@Hank890 Applied Materials Non-GAAP EPS of $1.85 misses by $0.05, revenue of $6.25B misses by $100M
I NAILED IT. NOT NONSENSE
Robert Shriver Barnes profile picture
Something I've been curious about is if tsmc converted all it's DUV arf-i 7nm N7 to arf + EUV or are they still making allot of DUV N7?

I'd love to see that mask table for all the modern nodes at TSMC, Intel and Samsung. It seems like 7nm class nodes at Intel and Samsung have horrible yields, I'm amazed TSMC was able to pull it off with such amazingly good yields.
t
@sailorbob74133
same thought after seeing asianometry on the 7nm challenge. tsmc pulled it off due to unmatched ecosystem and talent at running the most complex fab processes, shown repeatedly over decades. this is not easy for intel to replicate nor china to pilfer.
wonder why author thinks its a given.
Robert Shriver Barnes profile picture
@translate Ha, watched the same video. Also a big fan of that channel and of semiwiki.com.
Robert Castellano profile picture
@sailorbob74133 you can learn more about TSMC's 7nm efforts with and without EUV (N7 and N7P without EUV) at WikiChip
N
Robert thanks for the insight! Lam really looks as a very solid bet: major buyback in the pipeline with expanding revenue outlooks.

A question from my side: isn't ASML a rather different business than LRCX? But then again, looking at provided services and materials, all three of these are different and not direct competitors anyhow, am I right?

(kinda ASML fanboy over here 😂)
Robert Castellano profile picture
@Niki Naza ASML is a great company, just a lot of headwinds and CEO Wennink needs to execute better or go. Huge backlogs and a lot of finger pointing that its everyone else's cause but his.
ASML is different from Lam and Applied, except that it does make metrology/inspection equipment which competes directly with AMAT. I included ASML in this article comparison because it centered around EUV.
Take a look at my Chart 6. Stock share performance nearly identical for all 3 companies. Look at performance today (slight drop so far), yesterday (big drop), and the day before (big jump). They are traded as a sector and not individual companies, and analysts are to blame. I try to help readers out to cut out the chaff from the wheat, particularly my negative sentiment on AMAT.
Negative comments talk about how good AMAT has been doing and how wrong I've been. But, for reasons in the previous article and the fact that while AMAT has been going up, they've ALL been going up, or down.
Unfortunately bobbing head analysts won't say anything bad about AMAT for reasons I've alluded to, so you have to keep reading my articles, trying to explain why AMAT keeps losing market share to competitors each year since this management came on board, when the hoard of cash they make should have made their equipment a "slam dunk." And that's because of execution.
P
If that time line actually hold up, SMIC should add a hundred billion USD to its market cap in short order.
Pretty neat being an European with access to it in HK
Robert Castellano profile picture
@Peder Steen Jensen That's good news for you. Here in the US, investment houses sold the stock automatically for anyone who owned it and it is now an ADR.
N
@Peder Steen Jensen
I don't expect Mr. Market to have an objective opinion and show a proper valuation for SMIC anytime soon. Saying this as a long.
P
@Niki Naza I agree with that assessment, I'm in for decades. But if they are at volume production of 7nm already, a heavy rerating upwards would in all likelihood still leave them extremely undervalued. They could double or triple tomorrow and still be undervalued
FabulousBoringRoy profile picture
If SMIC is getting to 7nm I hope the US reconciles the CHIPS Act to help Intel get to 18A in 2024. With Intel foundry services it would help multiple US companies like Qualcomm, Nvidia, Apple etc.
S
@FabulousBoringRoy I wouldn’t get my hopes up about Intel foundry. Very different business model entirely. Even if they start to get it working it will be years from now.
FabulousBoringRoy profile picture
@SMF_USR I'm not heavily invested in Intel, but would like to see them succeed for the good of the industry and US in general. I am old enough to remember Intel being in a bad spot in the past and coming back very strong, hoping they can do it again.
M
Another hit piece on AMAT by Robert Castellano…what a surprise. I don’t think companies outside China are running to do business with SMIC anytime soon.
Robert Castellano profile picture
@MilesMayhem You don't think! I guess your knowledge of China semiconductors and their demand is about as good as your rational holding AMAT. Ever hear of Made In China 2025? If you own any semi stock you should know as it will ultimately impact AMAT revenues there, even without sanctions. Please. Don't let me get started on this topic.
SimpleTrader profile picture
@MilesMayhem 6 months ago, Senor Castellano recommended selling at $150 and subsequently has provided his insights several times; all free with solid reasoning.

Thanks Senor for your articles.
Robert Castellano profile picture
@SimpleTrader Thank you. Back in 2018 I starting telling readers of an oversupply coming in memory. seekingalpha.com/...
MU longs hated me. It took a while for Mr. Street to kick in and the memory market collapsed.
Before this new AMAT management came in, EVERY article I wrote about the company was positive. But I've been analyzing the semi space since 1985 and saw them coming a mile away. So I've been writing about it.
If we look at a 5-year chart of AMAT stock, it was flat because of mediocre performance. Then the stock, along with most other technology stocks, started rising just before the U.S. presidential election. We are now seeing that nearly all this uptick has evaporated.
Mr. Street is getting it right again.
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