According to research reports released by Wells Fargo & Co, semiconductor equipment giants and lithography equipment manufacturers are among the semiconductor equipment stocks that are most favored by Wells Fargo & Co and likely to benefit from the AI craze. Wells Fargo & Co stated that although the entire semiconductor equipment sector has reached historical highs, which may lead to short-term pullback trends and trigger more "difficult" profit expectations and target stock price settings, it is still bullish on the stock price trend of these leading companies. The institution reaffirmed the target stock prices of KLA Corp at $950 and Applied Materials at $280, which means that the potential increase in the stock prices of these two companies in the next 12 months is more than 15%.$KLA Corp (KLAC.US)$ and $Applied Materials (AMAT.US)$Regardless of AI chip production capacity of companies such as Intel, or HBM production capacity of storage chip giants such as Micron, Samsung and SK Hynix, these semiconductor equipment manufacturers that are essential to the various stages of chip manufacturing play a crucial role. Therefore, ASML Holding, Applied Materials and other semiconductor equipment giants are considered to hold the "lifeblood of chip manufacturing". $ASML Holding (ASML.US)$In the US stock market, these leaders in the semiconductor equipment field are the "low-key winners" who benefit from the unprecedented frenzy of global corporate AI deployment, as opposed to chip giants such as Taiwan Semiconductor Manufacturing Co. that investors worldwide are focusing on. Among them, Applied Materials, a semiconductor equipment provider that focuses on multiple important chip manufacturing processes such as atomic layer deposition (ALD), chemical mechanical polishing (CMP), wafer etching, and ion implantation, has experienced a wave of "long bull trend" with extremely stable steps, with a rise of up to 146% since 2023 and its stock price has repeatedly hit new highs since 2024.
In 2023, ChatGPT will be popular worldwide, and the heavy-duty video model Sora Wen Sheng will be launched in 2024, as well as NVIDIA's unbeatable performance in selling shovel in the field of AI for consecutive quarters, may mean that human society will gradually enter the era of AI from 2024. After experiencing the PC era and the era of smart phones, semiconductor equipment giants such as KLA Corp., ASML Holding, and Applied Materials will usher in a new "Golden Age" in the wave of AI around the world in 2024.
$Taiwan Semiconductor (TSM.US)$Semiconductor equipment giants such as ASML and Applied Materials are considered to hold the "lifeblood of chip manufacturing". They are essential for various stages of chip manufacturing including AI chip production and HBM production for storage chip giants such as Micron, Samsung and SK Hynix.
$NVIDIA (NVDA.US)$, $Broadcom (AVGO.US)$and $Micron Technology (MU.US)$Applied Materials, a semiconductor equipment provider focusing on key chip manufacturing processes such as Atomic Layer Deposition (ALD), Chemical Mechanical Polishing (CMP), wafer etching, and ion implantation, has gained a strong foothold in the semiconductor equipment market. It is one of the very few semiconductor equipment companies that have seen significant growth and stability amid the current unprecedented AI craze. With high-precision manufacturing equipment and customized solutions in areas such as wafer Hybrid Bonding and Through Silicon Vias (TSVs), it plays a significant role in the crucial advanced packaging steps of TSMC's 2.5D and 3D packaging.
"We still favor KLA Corp. and Applied Materials," wrote Wells Fargo & Co's analyst team, led by Joe Quatrochi, in a recent research report. "In addition, the high volume of lithography machine bookings is expected to increase the earnings per share of lithography machine giant ASML Holding by a large margin."
KLA Corp., which focuses on chip yield monitoring systems
Wells Fargo & Co's analysts have raised their expectations for chipmaker device spending in 2025 and 2026, mainly because under the drive of AI chips, overall chip demand continues to recover, led by TSMC, Samsung and other chip foundry giants, and the leading 2nm and below manufacturing technology, and the surge in DRAM and NAND storage demand under the background of AI boom. Wells Fargo & Co's analysis team currently predicts that chip equipment spending will reach $118 billion in 2025 and $123 billion in 2026, higher than Wells Fargo & Co's previous expectations of $90 billion and $120 billion.
Wells Fargo & Co said that KLA Corp., a semiconductor equipment giant focusing on defect detection and chemistry process control and yield management mechanisms in the chip manufacturing process, is also expected to benefit from the AI boom in an all-round way, because after the company announced its first-quarter results, investors' sentiment has significantly improved, which is largely due to the increasing confidence in the sales of chip yield detection equipment for 2nm high-end process in 2025.
KLA Corp is one of the leaders in the global semiconductor equipment market, especially in the chemical process control of chip manufacturing and chip yield monitoring fields. Its breakthroughs in broadband plasma optical inspection technology and the latest chip defect refinement inspection system provide semiconductor manufacturers with more powerful tools to improve production efficiency and product quality. Its advanced technology and equipment occupy an important position in the industry and are widely used in various semiconductor manufacturing processes. KLA collaborates closely with major chip manufacturers worldwide, providing customized solutions. Its clients include world-leading chip manufacturers such as Taiwan Semiconductor, Samsung, and Intel.
Analysts at Wells Fargo & Co wrote: "With implied bookings trending more stable into 1Q24 and the outlook for robust demand for 2025 being a key driver after a significant improvement in order activity for the rest of this year, we believe the Street is too conservative with its revenue growth flat YoY expectations for 2026." "As we think about the significant opportunity for 2nm market growth in 2025 and 2026, we believe Wells Fargo's Overweight rating on KLA and $950 target price represent potential upside of up to 15% over the next 12 months."
Applied Materials is ubiquitous in the chip plant.
Applied Materials' high-end equipment plays an important role in almost every step of chip manufacturing, covering multiple important chip-making processes such as Atomic Layer Deposition (ALD), Chemical Vapor Deposition (CVD), Physical Vapor Deposition (PVD), Rapid Thermal Processing (RTP), Chemical Mechanical Polishing (CMP), wafer etching, and ion implantation. Among them, Applied Materials has high-precision manufacturing equipment and customized solutions in areas such as wafer Hybrid Bonding and Through Silicon Vias (TSVs), which are crucial to the advanced packaging steps of TSMC's 2.5D and 3D packaging. $Applied Materials (AMAT.US)$
"Also, in the transition to 2nm chip-making technology, Applied Materials is likely to continue to benefit from leading global chip manufacturers' capacity expansion and continued share gains in the logic chip manufacturing domain, and is performing better in the back-end of chip manufacturing than people's concerns."
"In addition, as we transition into 2nm chip-making technology, Applied Materials is likely to continue to benefit from leading global chip manufacturers' capacity expansion and continued share gains in the logic chip manufacturing domain, and is performing better in the back-end of chip manufacturing than people's concerns." Wells Fargo analysts wrote. Wells Fargo reiterated its $280 target price for Applied Materials, implying a potential upside of up to 18% over the next 12 months, as the company's share price has repeatedly hit new highs.
"The peak of human technology" ASML shows no sign of stopping.
ASML from the Netherlands is the world's largest manufacturer of photolithography systems, with a reputation as "the peak of human technology." The photolithography equipment produced by ASML plays the most crucial role in the process of chip manufacturing. ASML is the sole supplier of extreme ultraviolet (EUV) lithography machines, which are used by TSMC, Samsung, and Intel to manufacture high-end process chips.
If the chip is the 'pearl in the palm' of modern human industry, then the lithography machine is the tool necessary to manufacture this 'pearl.' More importantly, ASML is the only supplier of the world's most advanced process chips, such as 3nm, 5nm, and 7nm chips for TSMC, Intel, and Samsung, the largest customers. Therefore, the demand for their products is the barometer of the health of the chip industry.
According to the latest report by TrendForce, TSMC's 2nm chip manufacturing process is expected to achieve mass production in 2025, and semiconductor equipment manufacturers such as ASML are preparing for intensive delivery work; It is expected that under the demand drive of TSMC and other chip foundry leaders, ASML's lithography machine shipments are expected to grow by 30% in 2025, with 53 units delivered this year and 72 units delivered next year. According to media reports, due to strong demand for 2nm chip-making process, TSMC's capital expenditures in 2025 are expected to reach between US$32 billion and US$36 billion, compared to the expected capital expenditures of US$28 billion to US$32 billion by 2024 mentioned at the April earnings conference, which may be raised by about US$4 billion.
An ASML spokesperson revealed in June that ASML will deliver the latest high-NA EUV lithography machine to TSMC, the largest lithography machine customer, before the end of this year, which directly drove up ASML's share price at that time. For TSMC and the 2nm and below node manufacturing technologies being developed by Intel and Samsung Electronics, ASML's high-NA EUV lithography machine is essential.
Compared to the standard EUV lithography machine currently produced by ASML, the main difference is the use of a larger numerical aperture. High-NA EUV technology uses a 0.55 NA lens, which can achieve a resolution of 8nm, while standard EUV technology uses a 0.33 NA lens. This new NA technology can print smaller feature sizes on chips, which is critical for the development of 2nm and below chip-making process technology. It is also critical for improving the computing power of AI systems used for AI training/inference fields, such as Nvidia's AI GPU. Currently, TSMC's H100/H200 AI GPU mainly uses a 4nm process, while the new Blackwell architecture AI GPU will use a 3nm process from TSMC, and may use a 2nm or even 1.6nm process in the future.
Wells Fargo & Co wrote in a research report: "Although we still believe that the resumption of orders for EUV lithography machines is only a matter of time (not whether it will happen), we believe that market expectations for the second quarter of 2024 may be more optimistic than before. If orders for the second quarter of 2024 are again lower than expected, we believe that any signs of weakness in ASML's stock will be seen as a buying opportunity by longs, as ASML has already established a positive catalyst path for the second half of 2024 amid a surge in demand for AI chips." Wells Fargo & Co raised its target price for ASML to $1185, meaning the lithography giant's stock could rise nearly 20% to hit a new high.
Semiconductor equipment makers focusing on "complexity" will continue to benefit.
Another Wall Street giant, Bank of America, recently released a research report stating that the current recovery cycle in the chip industry began in the late 2023 and is currently only in the third quarter, which means that the strong recovery trend may continue until mid-2026. Analysts at Bank of America pointed out that after experiencing an extremely depressed downward cycle, the chip industry usually experiences an upward cycle lasting for up to 10 quarters, and this pattern has just begun.
Bank of America mentioned in the research report that investors should focus on the three major investment themes in the chip industry: cloud computing, auto chips, and "complexity". Among them, in the theme of "complexity", Bank of America stated that the growing complexity in the chip manufacturing field will fully support the continuously rising valuations of chip manufacturers and semiconductor equipment suppliers. ASML, KLA Corp, Applied Materials and other semiconductor equipment giants, which can be described as the pinnacle of human technology, undoubtedly belong to the important role of this investment theme of "complexity".
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