What Are Services For Semiconductor Capital Equipment Manufacturing

Technology hardware today is largely driven past semiconductors. And it is the semiconductor equipment companies who back up the manufacturing of semiconductors through systems that examination and verify the final product.

It is of import to annotation that today, semiconductor manufacturers and semiconductor equipment providers are two unlike industries. At that place are specialized companies that do one or the other.

A listing of the largest semiconductor equipment companies includes:

ASML Holding Northward.5. (ticker: $ASML)
Practical Materials (ticker: $AMAT)
Lam Research (ticker: $LRCX)
KLA Corporation (ticker: $KLAC)

A list of the largest semiconductor manufacturers, which buy semiconductor equipment, include:

Taiwan Semiconductor Manufacturing Company (ticker: $TSM)
Samsung Electronics (traded in Korea)
GLOBALFOUNDRIES (ticker: $GFS)

To complete the semiconductors circle, there are likewise companies which specialize in just the designing of semiconductors, who and then outsource the bodily manufacturing to the specialized manufacturers. These include:

NVIDIA Corporation (ticker: $NVDA)
Broadcom (ticker: $AVGO)
Advanced Micro Devices (ticker: $AMD)
QUALCOMM (ticker: $QCOM)

A few companies, like Intel (ticker: $INTC) and Texas Instruments (ticker: $TXN), both design and manufacture semiconductors in-firm, and and so the economics of their business concern model can be different than a pure play designer (or "fabless companies") or pure play manufacturer (or "foundries").

Distinguishing these pieces of the value concatenation is critical if you are wanting to gauge the market shares of these semiconductor companies.

You cannot simply accept the revenues of every visitor in the semiconductor market (using a broad semiconductor list of companies such as the components of the iShares Semiconductor ETF); those numbers will tell you little most a company's actual competitors and market positioning.

Next, we will tackle the nuts of the semiconductor manufacturing process, which explain how semiconductor equipment companies make money.

The Basics of Semiconductors

In a nutshell, semiconductors are central pieces of physical technology. They serve as the brains, eyes, and ears—processing and storing information which enables the hardware to practice what it's supposed to.

Semiconductors can be impossibly precise, built on microscopic layers of metal.

Well-nigh are designed with billions of these microscopic transistors which are placed in a way to interact with piddling bursts of electricity.

Semiconductors today are designed on computers, and so shipped to the foundries (or "fabs") that take these software designs and turn that into the concrete product (or "semiconductor flake").

Once the semiconductor chip is created, information technology must be tested by equipment to brand sure that it functions in the way that the designer intended. Since the designs and machines involved in the manufacturing process are so circuitous, the equipment to examination the terminal product is also complex and can price millions of dollars for a single organisation.

Why These Companies Are So Profitable

One last thing to sympathize about the semiconductor industry is its unrelenting drive to continually innovate. Companies are ever striving to make semiconductor chips that are smaller, faster, and more efficient.

This phenomenon has been described by "Moore'south Police force", which was an idea from ane of the pioneers of semiconductors, Intel's co-founder Gordon Moore.

Moore's Law, according to semiconductor software provider Synopsys, is merely summarized as:

"Moore'due south constabulary is a term used to refer to the observation made by Gordon Moore in 1965 that the number of transistors in a dense integrated circuit (IC) doubles most every two years."

The integrated circuit is what semiconductor chips are comprised of. And so, this miracle enables technology hardware manufacturers to produce amend products with increasing functionality and features continuously.

As I wrote in my March 2022 issue of The Sather Research eLetter, you don't have to expect any further than the amazing capabilities of AirPods to see how innovation in semiconductors enables more functionality.

AirPods are incredibly small all the same can connect wirelessly through Bluetooth, and intelligently charge in a minor carrying case.

The continuous advancement of semiconductor technology means new semiconductor equipment systems take been in abiding demand—this should keep for as long equally semiconductors are fabricated smaller, faster, and more efficient.

Semiconductor Equipment Stocks Overview

Merely as in that location are semiconductor companies that specialize in either pattern, manufacturing, or testing, in that location are also companies that specialize in specific types of semiconductor chips.

With semiconductor equipment companies, they tend to serve two major applications:

Logic
Memory

Logic chips tin can encompass a broad range of semiconductor designs. Yous can recall of these like the "brains" of the hardware, computing and converting information in a myriad of ways and applications.

Memory chips are basically what they sound similar; memory fries store information. This information can be stored over the long term (similar on a hard drive), or just for a short time to help with processing power (like the RAM of a computer).

ASML Holding N.V. (ticker: $ASML)

Let's showtime take the biggest semiconductor equipment company by market capitalization today, ASML, and show their latest revenue breakdown:

Y'all can see that more of their revenues come up from logic than memory chips. This means they are providing advanced equipment to the fabs that are specializing in these kinds of semiconductors.

You might also annotation that a large portion of their revenues in 2021 came from "Installed Base Management". This displays another revenue commuter for semiconductor equipment companies.

Again, because these machines are so complex, information technology sometimes makes sense for the same company who manufactured the equipment to maintain the equipment for the fab. Not only can this salve time for the fab, simply information technology tin can also save coin, as they can deploy capital letter in the other very capital intensive aspects of the manufacturing process.

Investors tend to similar service-based revenues such as these because they are frequently recurring, and can be a more than reliable and consistent source of revenue over the long term.

Applied Materials (ticker: $AMAT)

From $AMAT'south latest investor presentation, we can see that the company has as well maintained a heavier weighting of revenues from logic customers, though information technology is much more counterbalanced than ASML.

All the same, the company also discloses that iii of the years over the past 20 have seen the reverse mix, which follows one of the natural orders of semiconductors.

The semiconductor industry, in general, runs on cycles, where in that location are flurries of orders and expansion followed past a "pulling back" period.

This means that the revenues for semiconductor companies can swing wildly through the cycles, and both logic and retentiveness can (and do) run on dissimilar cycles depending on many other factors, which explains why the acquirement mix for a company like Applied Materials can fluctuate from twelvemonth-to-twelvemonth.

Lam Research (ticker: $LRCX)

In a distinguishing characteristic from its other peers, Lam Research tends to bulldoze the majority of revenues from the Memory marketplace. And then its earnings tends to fluctuate with the memory bit wheel rather than the logic cycle.

Nosotros can see from the company's slide that they further distinguish their Memory segment betwixt NVM and DRAM—DRAM existence an example of the type of memory I described before that deals with curt-term storage rather than long term.

Notice the large portion of revenues which come up from Asia for the visitor; this is a cardinal feature I will bear upon on below as information technology tin greatly affect the overall results for the semiconductor equipment companies.

KLA Corporation (ticker: $KLAC)

Finally, we have KLA Corporation, which not only has a large exposure to Foundry & Logic but also boasts of a leading market share in Process Control.

Retrieve that each of these companies systems can be unique, so comparing market shares won't always be apples-to-apples.

There are a myriad of details to discover surrounding each company's equipment, whether nosotros are talking about more advanced engineering science features like etching, lithography, or metrology. Some of these details could play a role in the success of these companies, their market shares, and potential competitive advantages, and should require further investigation for investors who are serious in buying semiconductor equipment stocks.

Risks for Semiconductor Equipment Companies

Because semiconductor manufacturing has been so complex and capital intensive, there are only a few companies that are on the leading edge. With the foundries, the only game in town is actually Taiwan Semiconductor Manufacturing Company (also known as TSMC) and Samsung.

Most of TSMC's fabs were built in Taiwan; the majority of Samsung's are in South korea.

This means that much of the manufacturing of the most advanced semiconductors runs through two Asian countries which are far abroad from U.S. investors.

Much of the semiconductor supply chain runs through Taiwan, South korea, and also Prc; as a result, many customer orders for semiconductor equipment companies like ASML and KLA Corp run straight into these countries. An overwhelmingly large portion of revenues for many of these companies are based on operations in Southeast Asia.

The manner this supply chain is synthetic carries inherent geopolitical risk for investors in these companies.

In particular, relations betwixt the United States and Communist china have become strained in contempo years, and this creates uncertainties as it relates to the profitability of some semiconductor companies.

For instance, Chinese company Huawei was banned from U.S. engineering science in 2020 and could not apply the services of TSMC, considering TSMC's manufacturing process included U.S. technology from companies similar the semiconductor equipment manufacturers discussed higher up.

With Red china's close ties and geography to key countries in Southeast Asia, a farther straining of US-China relations could upend other companies' business models completely.

Tariffs, bans, and sanctions can all negatively impact a company's profitability, and is a major reason why investors should proceed with caution if wanting to invest in these blazon of companies.

Semiconductor Complexity Magnifies Supply Risk

Because avant-garde semiconductor technology is so capital intensive and time consuming, the supply chain risk doesn't appear to be changing anytime presently.

Equally an example of this—it tin can take several years for a visitor to build a new fab for manufacturing and have it fix for operations.

In add-on, there are strict capacity limits to semiconductor manufacturing. A fab can just produce and then many chips at a fourth dimension, and foundries like TSMC accept seen their most advanced manufacturing at total capacity as demand has outstripped capacity.

There's likewise the fact that the pattern process for cutting edge semiconductors can exist extremely difficult.

Nearly semiconductor progress comes in iterative steps; a company will take design concepts from a previous applied science and apply it to the adjacent technology step, adjusting for hiccups and physical limitations every bit they are discovered.

So, it's very hard, if not impossible, to spring from one technology stride to a much smaller one; progress tends to be more efficient if a company climbs 1 pace at a time rather than jumping far ahead all at once.

Information technology takes much engineering know-how, which can include patents and other kinds of trade secrets, to get from ane cutting edge pattern to the next.

All of this process and enquiry takes money to accumulate, lots of it.

That's merely on the blueprint side.

When you include the foundries and the extraordinarily expensive machines and equipment systems needed to run at full capacity, you have huge barriers to entry which tin can greatly hinder disruption in these value chains.

That means these overall dependencies, both the risks and benefits, are ones that are probable to impact investors for a while to come.

Investor Takeaway

Hopefully this breakup has helped you lot navigate some of the intricate pieces of this manufacture. With better agreement and deeper cognition, you tin can get-go getting better at evaluating industry market place share and changes in competitive positioning.

If this felt like a firehose, don't worry too much. Knowledge like this compounds, and the more than you larn about the semiconductor equipment companies—their peers, customers, and suppliers—the meliorate you tin empathise the bigger picture.

This means that the lessons build on themselves; each fourth dimension you effort and learn well-nigh a semiconductor visitor or specialty manufacture, it will become easier as you build on a mental model from your previous efforts.

As an investor in individual companies, it's your responsibleness to achieve a circle of competence, which means a thorough understanding of the business model and what makes it tick.

Hopefully this post and others on our site can help you lot through this.

Above all, remember the fundamental principles of investing…

Invest with a margin of safety, emphasis on the prophylactic… Don't forget to diversify… And always, ever, e'er, buy and hold for the long term.