We recently published a list of 10 Best Semiconductor Equipment Stocks to Buy Now. In this article, we are going to take a look at where KLA Corporation (NASDAQ:KLAC) stands against other best semiconductor equipment stocks to buy now.
Semiconductors are the modern-day equivalent of oil when it comes to the general well-being of the global economy. Tens of thousands of gadgets, computers, cars, and other items and products rely on a steady stream of chips to power up today’s world. As a result, chip manufacturers often have a steady flow of orders that they have to consistently churn out to ensure that a multitude of industries are not disrupted.
However, while chip manufacturers often see most media coverage, the complex nature of transforming sand into a chip capable of 20 petaflops of output requires thousands of steps. To execute these steps, manufacturers rely on a diverse set of suppliers for a myriad of products such as chip manufacturing machines, specialty chemicals, masks, design technologies, and other items. Firms that provide these products and technologies are called semiconductor equipment providers and their role in the industry is just as important as the chip manufacturers’ is.
To understand why semiconductor equipment stocks are important, consider the Biden Administration’s $280 billion CHIPS and Science Act. Signed by the President in 2022, it aims to ensure that the American semiconductor industry catches up to its peers in Taiwan and South Korea and is not dependent on any disruptions in the South China Sea. The biggest beneficiary of the CHIPS Act is the Taiwanese contract chip manufacturer that leads the world in manufacturing technologies. It ranked 4th on our recent list of trending AI stocks, and the firm has received $6.6 billion in direct funding and it is eligible for $5 billion in additional loans to set up advanced manufacturing facilities in Arizona.
Yet, even though the first of these facilities is set to start production in the first half of 2025, the fact that the firm’s operations are based in Taiwan is already creating problems. For starters, a report from Reuters suggests that the world’s leading AI GPU manufacturer (which ranked 3rd on our list above) might have to ship its GPUs to Taiwan for packaging after they’ve been manufactured in the US. This is because after the chips are manufactured, they have to be packaged to ensure power supply and communications with the rest of the computer system.
The packaging technologies for these advanced chips are called Chip-on-Wafer-on-Substrate (CoWoS), and for the Taiwanese firm, all of its packaging facilities are located in its home region. The need to ship the chips to Taiwan for packaging is not the only hurdle for the fab’s American manufacturing operations. Another problem, and one that is directly related to semiconductor equipment stocks, relates to the different chemicals that are required throughout the chip manufacturing process.
These chemicals include sulfuric acid, acetone, ammonium hydroxide, and others to ensure the purity of the silicon wafer throughout the fabrication process. However, according to a report from Macquarie Bank, since the Taiwanese fab relies on Taiwan-based firms for its chemical supply chain, the costs of manufacturing chips at the Arizona site could be 30% higher than in Taiwan. The higher costs stem from the fact that the chemical companies are hesitant to move to the US since they might be unable to enjoy economies of scale and the resulting cost benefits. The bank outlines that the lack of an American chemical supply chain that is qualified by the Taiwanese fab means that chemicals such as sulfuric acid might be costlier to ship internationally than their list price.
Therefore, it’s clear that semiconductor equipment firms play an equally important role in chip fabrication. Another important example of this fact is the Dutch chip manufacturing machinery provider that ranked 9th on a recent list of AI news and ratings that Wall Street was watching. This firm is the only company in the world capable of manufacturing high-end chip-making tools called EUV scanners. Without these tools, firms such as the Taiwanese fab cannot make leading-edge chips with feature sizes smaller than 7-nanometer. In fact, the rising threat of China utilizing Western technologies for military use has also led the US government to stop the chip manufacturing equipment provider from selling its equipment to China’s Semiconductor Manufacturing International Corporation (SMIC). The sanctions have dealt a sharp blow to Chinese chip manufacturing ambitions, with the latest chip from Huawei still being manufactured on the older 7-nanometer node. In contrast, the latest iPhone uses chips built through the 3-nanometer process technology.
Our Methodology
To make our list of the best semiconductor equipment stocks to buy, we ranked all US-listed semiconductor equipment stocks by the number of hedge funds that had bought the shares in Q3 2024 and picked out those with the highest number of investors.
Why are we interested in the stocks that hedge funds invest in? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
The inner workings of a semiconductor manufacturing facility, neon hued machines humming with activity.
KLA Corporation (NASDAQ:KLAC)
Number of Hedge Fund Holders In Q3 2024: 61
KLA Corporation (NASDAQ:KLAC) provides etching, inspection, deposition, and other equipment used in the chip fabrication process. Its strengths are in the inspection end of the chip fabrication equipment sector. The shares are up by 16.7% year-to-date following a massive 19% drop in October after investors became worried about a slowdown in the industry after chip-making equipment manufacturer ASML disappointed with its 2025 guidance. KLA Corporation (NASDAQ:KLAC) is also particularly vulnerable to American chip sanctions against China that prevent US firms from selling their machines. The vulnerability stems from the fact that as of Q3, 42% of the firm’s revenue came from China. However, the firm has seen tailwinds from AI demand on its income statement, which led to its fourth-quarter revenue guidance of $2.95 billion beating analyst estimates of $2.86 billion. KLA Corporation (NASDAQ:KLAC) also has a strong partnership with TSMC that provides it with stable revenue from the world’s largest contract chip manufacturer.
KLA Corporation (NASDAQ:KLAC)’s management shared details about its AI revenue during the Q3 2024 earnings call. Here is what they said:
“We also continue to see AI as an important driver and enabler of our business. Growth in demand for AI CHIPS supports rising process control intensity, which benefits KLA meaningfully. Additionally, KLA was an early adopter in using and incorporating AI into our products and designing our computer architecture to leverage GPUs. KLA’s future product enhancements will leverage AI to improve the performance and customer cost of ownership of our leading-edge systems.”
Overall, KLAC ranks 3rd on our list of best semiconductor equipment stocks to buy now. While we acknowledge the potential of KLAC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than KLAC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
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