Under the AI boom, the low-key winners not to be missed! US stock semiconductor equipment giants gearing up for a new round of gains

According to the financial news app Zhitong Finance, Wells Fargo, a giant commercial bank on Wall Street, recently released a research report stating that semiconductor equipment giants KLA Corporation (KLAC.US) and Applied Materials, Inc. (AMAT.US), as well as lithography machine manufacturer ASML Holding (ASML.US), are among Wells Fargo's most favored semiconductor equipment stocks expected to benefit from the AI boom. Wells Fargo mentioned that despite the entire semiconductor equipment sector hitting record highs, which may lead to a short-term correction trend and trigger "challenging" profit expectations and target stock price settings, they still have a positive outlook on the stock price performance of these industry leaders. The institution reiterated a target stock price of $950 for KLA Corporation and $280 for Applied Materials, indicating a potential increase of over 15% in the next 12 months for these two companies that have repeatedly hit new highs.

In 2023, ChatGPT became popular worldwide, in 2024, Sora's large-scale video model was launched, and NVIDIA, known as the "shovel seller" in the AI field, has delivered unparalleled performance for multiple quarters, indicating that human society may gradually enter the AI era starting in 2024. After experiencing what can be called the "golden age" of the PC era and the smartphone era, semiconductor equipment giants like KLA Corporation, ASML Holding, and Applied Materials may usher in a new "golden age" in the global AI wave starting from 2024.

Whether it's TSMC's AI chip production capacity, or the HBM production capacity of major memory chip manufacturers such as Micron, Samsung, and SK Hynix, these semiconductor equipment manufacturers that are crucial to various stages of chip manufacturing play a vital role. Therefore, ASML Holding, Applied Materials, and other semiconductor equipment giants hold the "lifeline of chip manufacturing."

In the US stock market, compared to global investors' focus on chip giants like NVIDIA, Broadcom, and Micron, the leaders in the semiconductor equipment sector can be seen as the "low-key winners" benefiting from the unprecedented enthusiasm of global enterprises in deploying AI. Among them, Applied Materials, a semiconductor equipment provider focusing on atomic layer deposition (ALD), chemical mechanical polishing, wafer etching, ion implantation, and other critical chip manufacturing processes, has shown a strong "bullish trend," with a surge of up to 146% since 2023 and hitting new highs in 2024.

"We continue to favor KLA Corporation and Applied Materials," wrote a research report by a team led by Wells Fargo analyst Joe Quatrochi. "In addition, the higher lithography machine bookings are expected to significantly increase earnings per share for the lithography machine giant ASML Holding."

Focus on KLA Corporation in Chip Yield Monitoring Systems

Wells Fargo analysts have raised their expectations for semiconductor equipment spending by chip manufacturers in 2025 and 2026. The main logic behind this is the continuous recovery of overall chip demand driven by AI chips, led by chip foundry giants like TSMC and Samsung and cutting-edge manufacturing technologies of 2nm and below, as well as the surge in DRAM and NAND storage demand against the backdrop of the AI boom Wells Fargo's analysis team currently predicts that chip equipment spending will reach $118 billion in 2025 and $123 billion in 2026, higher than Wells Fargo's previous expectations of $90 billion and $120 billion.

Wells Fargo stated that semiconductor equipment giant KLA, focusing on defect detection, chemical process control, and yield management mechanisms in the chip manufacturing process, is also expected to benefit significantly from the AI boom. After the company announced its first-quarter performance, investor sentiment improved significantly, largely due to market confidence in the sales of 2nm high-end chip yield detection equipment in 2025.

KLA is one of the global leaders in the semiconductor equipment market, especially in the areas of chemical process control and chip yield monitoring in chip manufacturing. Its breakthroughs in broadband plasma optical inspection technology and the latest chip defect fine inspection systems provide semiconductor manufacturers with more powerful tools to improve production efficiency and product quality. Its advanced technology and equipment play a crucial role in the industry and are widely used in various semiconductor manufacturing processes. KLA closely collaborates with major chip manufacturers worldwide, providing customized solutions. Its customers include leading chip manufacturers such as TSMC, Samsung, and Intel.

Wells Fargo analysts wrote, "As implied bookings for the first quarter of 2024 stabilize, significant improvements in order activity for the remainder of this year and optimistic demand prospects for 2025 will be key drivers of the stock price." "As we see significant growth opportunities in the 2nm market in 2025 and 2026, we believe Wall Street's flat revenue expectations for KLA in the 2026 calendar year are overly conservative." Wells Fargo reiterated its "Buy" rating for KLA and a target price of up to $950, implying a potential increase of up to 15% within 12 months.

Ubiquitous Application Materials in Chip Factories

In chip factories, Applied Materials (AMAT.US) is ubiquitous. Unlike ASML, which has always focused on the lithography field, the high-end equipment provided by Applied Materials, headquartered in the United States, plays a crucial role in almost every step of chip manufacturing. Its products cover 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. Applied Materials has high-precision manufacturing equipment and customized solutions for wafer hybrid bonding and silicon through-silicon via (TSV), which are crucial for TSMC's 2.5D and 3D advanced packaging steps.

Wells Fargo stated that Applied Materials will also benefit from improved investor sentiment, as investors will continue to focus on the company's strong market position in the semiconductor equipment sector to benefit from semiconductor manufacturers' ongoing investments in advanced packaging technology and HBM storage systems "In addition, as the transition to 2nm chip manufacturing technology continues, Applied Materials is expected to continue expanding capacity for leading global chip manufacturers and continuously gaining market share in the logic chip manufacturing field, performing much better in the backend of chip manufacturing than people are worried about," analysts at Wells Fargo wrote. Wells Fargo reiterated the institution's $280 target price for Applied Materials, implying a potential upside of up to 18% for Applied Materials, whose stock price has repeatedly hit new highs in the next 12 months.

"Peak of Human Technology" ASML's Rising Momentum Unabated

ASML from the Netherlands is the world's largest scale manufacturer of lithography systems, with the reputation of "Peak of Human Technology". The lithography equipment produced by ASML plays a crucial role in the process of chip manufacturing. ASML is the sole supplier of the most advanced extreme ultraviolet (EUV) lithography machines used by TSMC, Samsung, and Intel to manufacture high-end process chips.

If chips are the "pearl in the palm" of modern human industry, then lithography machines are the essential tools to produce this "pearl". More importantly, ASML is the only supplier in the world for the most advanced process chips such as 3nm, 5nm, and 7nm chips requiring EUV lithography equipment. Therefore, the demand for its products from major customers such as TSMC, Intel, and Samsung serves as a barometer of the health of the chip industry.

According to the latest report from TrendForce, TSMC's 2nm chip manufacturing process is expected to achieve mass production in 2025, and semiconductor equipment manufacturers such as ASML are gearing up for intensive delivery work; it is expected that driven by the demand from leading chip foundries such as TSMC, ASML's lithography machine shipments are expected to increase by 30% in 2025, with 53 units delivered this year and 72 units next year. Media reports have stated that due to strong demand for 2nm chip processes, TSMC's capital expenditure in 2025 is expected to reach $32 billion to $36 billion. Compared to the "capital expenditure is expected to range between $28 billion and $32 billion in 2024" mentioned at the April conference, it is expected to be raised by about $4 billion.

An ASML spokesperson revealed in June that ASML will deliver the latest high-NA EUV lithography machine to its largest lithography machine customer, TSMC, known as the "King of Chip Foundries," by the end of this year. This news directly drove ASML's stock price surge at that time. For TSMC, as well as Intel and Samsung Electronics developing 2nm and below node manufacturing technologies, ASML's high-NA EUV lithography machine is extremely important.

Compared to the standard EUV lithography machines currently produced by ASML, the main difference lies in the use of a larger numerical aperture (NA). The high-NA EUV technology uses a 0.55 NA lens, achieving an 8nm-level resolution, while the standard EUV technology uses a 0.33 NA lens. This new NA technology can print smaller feature sizes on chips, which is crucial for the development of process technologies for 2nm and below chips, and for high-performance AI accelerators such as NVIDIA AI GPUs used in AI training/inference fields, The 2nm and below processes are crucial for the enhancement of AI system computing power. Currently, NVIDIA's H100/H200 AI GPUs mainly use TSMC's 4nm process technology, while the newly launched Blackwell architecture AI GPU will adopt TSMC's 3nm process technology, with the potential to shift to TSMC's 2nm or even 1.6nm process technology in the future.

Wells Fargo stated in a research report: "While we still believe that the acceleration of EUV lithography machine orders is only a matter of time (rather than if), we believe that the market's expectations for the second quarter of 2024 may be more optimistic than before. If orders in the second quarter of 2024 fall below expectations again, we believe that any signs of weakness in ASML's stock will be seen as a buying opportunity by the bulls, as ASML has already established a positive catalyst path for the second half of 2024 amid surging demand for AI chips." Wells Fargo significantly raised ASML's target price to $1185, implying a nearly 20% increase for the lithography giant ASML to reach a new high.

Semiconductor equipment companies focusing on "complexity" will continue to benefit

Another major Wall Street bank, Bank of America, recently released a research report stating that the current chip industry recovery cycle began in late 2023 and is currently only in the third quarter, indicating that the strong recovery momentum may continue until mid-2026. Analysts at Bank of America pointed out that after experiencing an extremely sluggish downward cycle, the chip industry typically enters an upswing cycle lasting up to 10 quarters, and this pattern has just begun.

Bank of America mentioned in the research report that investors should focus on three major investment themes in the chip industry: cloud computing, automotive chips, and "complexity." In the complexity theme, Bank of America stated that the increasing complexity in the chip manufacturing field will fully support the continuous rise in valuations of chip manufacturers and semiconductor equipment suppliers. ASML, known as the "pinnacle of human technology," as well as KLA and Applied Materials, unquestionably belong to the important role of the "complexity" investment theme among semiconductor equipment giants