They note that in 2021, TSMC boosted its spending on trailing node production from 10% of total capital spending to 20% year over year to meet the greater demand for specialty chips. Their definition of IoT devices includes automobiles and other industrial markets, not only radar or lidar modules, and sensors.
Another important aspect of Jefferies’ outlook is what the analysts call the nationalization of semiconductor manufacturing. Over the next five years, global government incentives are forecast to total approximately $84 billion. TSMC, Intel, Micron, SK Hynix and Samsung already have announced capital expenditure plans valued at around $109 billion annually. Spending on equipment is expected to account for more than 58% of all capex over the next two to three years.
One general comment Jefferies’ analysts make about these three companies is that they “have morphed into extremely well run cash flow and capital return machines, only now they also have secular growth stories to go with them.”
In specific comments on Applied Materials, Jefferies notes that the company’s share of the deposition market is 43% and the company derives about 50% of its revenues from deposition equipment. Of the three companies, Applied Materials is forecast to post the highest 2022 free cash flow growth per share at 34%.
KLA leads the industry with a 50% share of the process control market, from which the company derives about 90% of its revenue. It is the most dominant company in its sector and the most profitable of the three firms in the Jefferies report. The analysts also think that KLA “has an opportunity to increase its capital return model to 100% from 70%” of free cash flow.
In the etching market, Lam Research has a 36% share, along with exposure to 60% of the volatile memory chip industry. The company’s exposure to 33% of the services industry is an “extremely consistent and predictable business, offering a nice counterbalance to the potential swings in the memory business.”
Applied Materials traded down about 1% Wednesday morning, at $156.72 in a 52-week range of $889.28 to $163.02. The high was posted last week. The dividend yield is 0.60%.
KLA traded down by less than 1% to $429.62, in a 52-week range of $261.81 to $442.44. KLA’s high was also reached last week. The company’s dividend yield is 0.97%.
Shares of Lam Research traded down about 1.2%, at $703.65 in a 52-week range of $481.05 to $731.85. That high was posted Tuesday. The company’s dividend yield is 0.84%.
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