Overview Of The Semiconductor Capital Equipment Industry

Introduction

If you do not know anything about semiconductors and you listen to a presentation by a semiconductor capital equipment company, you will quickly be lost. I know because I was there before. Management continuously rattles off terms like logic, foundry, DRAM, NAND, fab, wafer, etc. I said to myself, “what are these guys talking about?!?!” Eventually, I had to do a deep dive into the industry to understand it which included reading an entire book about it. 

The semiconductor industry manufacturers integrated circuits (“chips”) for a variety of electronics, including computing devices, network equipment, and storage devices. The rise of new technological advancements such as autonomous vehicles, big data analytics, edge computing, immersive devices (e.g.virtual reality), internet of things, machine learning, robotics, and so on are not only requiring more chips but continually more advanced chips. This is good business for companies who make the equipment to advance chip technology. Furthermore, China is investing aggressively in all these new technologies which is also increasing the demand for semiconductor equipment. 

More Data = Semiconductor Growth Opportunity

The following presentation slide shows the broad opportunity set for the semiconductor industry in this new “Data” era:

source: KLA-Tencor NASDAQ 39th Investor Conference    presentation   ;    click to enlarge

source: KLA-Tencor NASDAQ 39th Investor Conference presentationclick to enlarge

This slide shows the expected revenue growth out to 2025 for the end markets of the semiconductor industry:

source: ASML    presentation   , Gartner;    click to enlarge

source: ASML presentation, Gartner; click to enlarge

You can see from this slide that the #1 growth driver for the semiconductor industry is Servers, Datacenters & Storage which is being driven by the rise of cloud computing.

These growth drivers are adding up and semiconductors are increasingly becoming a larger part of the world economy, as this slide shows:

source: Lam Research investor    presentation   , WSTS, IMF;    click to enlarge

source: Lam Research investor presentation, WSTS, IMF; click to enlarge

Semiconductors are an important growth business and semiconductor capital equipment is an essential sub-industry worth understanding. 

Chip Types

At a high level, there are two types of chips that are commonly produced by semiconductor manufacturers like Intel (INTC), Micron (MU), Samsung (SSNNF; SSNLF), SK Hynix (HXSCF; HXSCL), and Taiwan Semiconductor (TSM).These are memory and logic. Let's take a look at each of these. 

Memory chips are used to store data electronically in the form of bits (8 bits = 1 byte). The most common types of memory chips made by the industry today are Dynamic Random Access Memory ("DRAM") and NAND flash. DRAM is volatile memory, which means it temporarily stores each bit of data in a separate capacitor while the associated device is powered on. DRAM is commonly used by data servers and mobile devices. NAND (short for NAND flash) is non-volatile memory ("NVM"), which means it stores data even if the power is switched off. It is called NAND because it is a type of memory that resembles the NAND (not-and) logic. NAND is commonly used in memory cards and solid state drives("SSD"). The major trend in memory today is the switch to three-dimensional (3D) memory where memory cells are built vertically, instead of horizontally (planar), which increases memory bit density.

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Disclosure: KLA-Tencor is a holding in client portfolios. I have an economic interest in the performance of the stock. The above True Vine Letter is an excerpt from a recent more

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Barry Hochhauser 4 months ago Member's comment

This is great. I've often asked "what are these guys talking about?!"

Joshua Hall 4 months ago Author's comment

Barry,

I knew I wasn't the only one!

Susan Miller 3 months ago Member's comment

You aren't!

Harry Goldstein 4 months ago Member's comment

Impressive stuff.

Joshua Hall 4 months ago Author's comment

Harry,

Thanks for the kind word.