Why Semiconductor Equipment Stocks Applied Materials, Lam Research, and KLA Corp. Rallied Today

On Thursday, the shares of major semiconductor equipment companies saw a significant increase. Applied Materials (AMAT) surged by 4.5%, Lam Research (LRCX) rose by 4%, and KLA Corporation (KLAC) climbed by 4.3%. These three companies are central players in the semiconductor equipment industry and hold a major share of this oligopoly.

Despite their long-term success and solid returns, the recent performance of these stocks had been disappointing, with each stock declining between 20% and 32% from their peaks during the summer. However, the recent rally may signal a reversal in this trend.

Impact of TSMC’s Earnings Report

The rise in stock prices coincided with the earnings report from Taiwan Semiconductor Manufacturing (TSMC), which announced higher-than-expected capital expenditures for the upcoming year during its fourth-quarter earnings call. TSMC's optimistic forecast suggests a large growth cycle that could last for five years, boosting investor sentiment.

As the dominant player in the semiconductor manufacturing sector, TSMC plays a vital role in the industry. It currently dominates cutting-edge semiconductor production, supporting renowned chip designers such as Nvidia and Apple. Many of the revenues from companies like Applied Materials and Lam Research depend on TSMC's success.

In recent months, concerns regarding the sustainability of growth in the artificial intelligence (AI) sector and lackluster performance in traditional markets like PCs and smartphones caused these stocks to falter. Nevertheless, TSMC's projections have likely alleviated some of these worries. The company now anticipates an impressive compound annual growth rate (CAGR) of nearly 20% for its revenue from 2025 to 2029, with an even higher forecast of around 40% for AI-related products.

TSMC mentioned that AI chips are expected to account for nearly 15% of its overall revenue in 2024, a figure projected to rise significantly. This expected growth will drive demand for semiconductor equipment, leading TSMC to forecast a notable increase in capital expenditures to a range between $38 billion and $42 billion for the coming year. This forecast represents a substantial 33% increase from its 2024 spending and exceeds the previous annual high of $36.3 billion recorded in 2022.

This anticipated rise in investment is advantageous for Applied Materials, Lam Research, and KLA Corporation. Both Applied and Lam specialize in the manufacturing of essential etch and deposition equipment crucial for constructing and managing semiconductor materials. With the industry on the brink of adopting gate-all-around transistors and new advances like backside power delivery anticipated for 2026, the market for their equipment should expand.

Furthermore, rigorous defect measurement is critical at every stage of semiconductor production. As the leading company in metrology and process control equipment, KLA Corporation is poised to benefit from TSMC's increased spending on equipment and technology.

Long-Term Prospects for Semiconductor Equipment Stocks

For investors looking to buy and hold, these semiconductor equipment companies represent strong long-term opportunities. Their success is closely tied to the dynamic and growing semiconductor industry, which is expected to continue expanding at a rate above GDP for the foreseeable future. Moreover, these companies have demonstrated solid profitability and are known for returning significant cash to their shareholders.

However, the semiconductor sector can also be quite volatile. The recent declines of 20% to 30% from their summer highs highlight this risk, especially since the semiconductor market itself has not yet entered a traditional bear phase.

Despite the cyclical nature of these stocks, the semiconductor industry is likely to innovate continually, reaching new heights over time. Thus, for investors prepared to weather potential drawdowns of 40% or more, these companies should be on their buy list during periods of price dips. The recent surge in stock prices is a clear reflection of this strategy in action, indicating a rebound from a recent six-month slump.

semiconductors, stocks, investment