Despite the view from Wall Street analysts and their rose-colored glasses, the woes of the semiconductor industry continue.
Last month, a warning came from Peter Wennick, CEO of ASML Holding (ASML), a manufacturer of chip-making equipment. In an interview with the Financial Times, Wennick said: “Next year and the year after, there will be shortages. We’re going to ship more machines this year than last year and… more machines next year than this year. But it will not be enough if we look at the demand curve. We really need to step up our capacity significantly more than 50%. That will take time.” The reason ASML needs time to expand production are problems in its own supply chain.
Massive Shortage in Chip Supply Chain
Semiconductor manufacturers are trying to expand production capacity to meet demand from industries, such as the automakers. However, due to unprecedented parts shortages and other supply chain constraints that are battering the semiconductor tools industry, the chipmakers are having to wait a year and a half to two years—or even longer—for key equipment.
Leading chip tool makers—including the aforementioned ASML, as well as Applied Materials (AMAT), KLA (KLAC), and Lam Research (LRCX)—are warning their clients they will have to wait up to 18 months for some crucial machines. AMAT and the others are citing shortages in everything from lenses, valves and pumps to microcontrollers, engineering plastics and electronic modules.
Delivery times have increased sharply on these very basic parts, from about three or four months on average before the pandemic in 2019, to between 10 and 12 months last year. Today, the expected delay time is more than a year in length.
No wonder that many in the semiconductor industry now say the delays in getting chip production equipment are the “worst in decades,” as both component shortages and logistical delays mount throughout the supply chain.
Here is just one example cited in an article from the Nikkei Asia: deliveries of the equipment used to make substrates—the base material that carries chips before they are mounted on printed circuit boards—can take up to 30 months, compared with 12 to 18 months last year.
This is not a good situation when you consider that Taiwan Semiconductor Manufacturing (TSM), United Microelectronics, Samsung Electronics, and Intel (INTC) all have plants scheduled to come online as soon as next year.
The most likely outcome is that these plants will have their chip production delayed, possibly for a year or more. Construction of TSM’s U.S. plant was already behind schedule due to labor shortages. Now, the delay will be even longer.
This will obviously have a domino effect across numerous industries that are waiting for chips…and, when the chips finally do arrive, it is likely they will be at a higher price. For example, Taiwan Semiconductor plans a 10-20% price hike for its eight-inch foundry services, with the new prices to be effective starting the third quarter of 2022.
Why This Is Happening and How to Profit
ASML told Nikkei Asia: “There is consensus in the industry that the chip shortage could last two years. The entire industry is ramping up to address this.”
But this is not really happening across the industry: many smaller companies that make critical components and supply chip equipment makers are reluctant to expand their capacity. Only a handful of small companies make certain precision components, such as chemical-handling pumps by Japan’s Iwaki, and high-end lenses by Germany’s Zeiss.
And it’s not as if the chip equipment makers can easily switch suppliers. It is hard to find suitable alternatives for these types of items. Any alternative components must go through a lengthy verification process to ensure production continuity and quality.
Despite the current woes, the chip equipment industry still looks good over the medium-term. The sector is well-positioned amid the urgent need for new semiconductor fabrication capacity to address the worldwide semiconductor shortages. Plus, their business backlogs are enormous.
But as Warren Buffett said: “Be fearful when others are greedy, and greedy when others are fearful”—a phrase that encapsulates contrarian investing philosophy. So, for you contrarians out there, one company to look at is KLA Corporation. Unlike its peers in the industry, its stock is barely down 2% over the past year, while other stocks have tumbled.
KLA is a leading supplier of process-control and yield-management solutions for the semiconductor industry. Its products are in every major chip manufacturing facility in the world, and its tools help integrated circuit manufacturers manage yield throughout the semiconductor manufacturing process. KLA provides chip and wafer manufacturing products, including defect inspection and review, metrology solutions, lithography software, etc.
In its latest quarter, KLA reported strong year-over-year growth, with revenue up more than 40% and non-GAAP EPS rising more than 70% annually. The company continues to build on its industry-leading market share in process control and metrology, with demand for wafer inspection tools growing more than 60% in the latest quarter.
Keep in mind that production of ever-smaller semiconductors (such as those made by Taiwan Semiconductor) requires AI-enabled tools for wafer inspection and defect identification. KLA remains the established leader in this area. So any weakness in KLA stock, looks like a buying opportunity. Any purchase near its current price of $335 per share seems reasonable.
