Why Semiconductor Equipment Stocks Applied Materials, Lam Research, and KLA Corp. Rallied Today

Shares of semiconductor equipment giants rallied big on Thursday, with Applied Materials (NASDAQ: AMAT), Lam Research (NASDAQ: LRCX), and KLA Corporation (NASDAQ: KLAC) jumping 4.5%, 4%, and 4.3%.

These three stocks collectively account for much of the large oligopoly in semiconductor equipment, and each stock has had excellent long-term returns as a result. However, the near-term picture hasn't been as good, with each down between 20% and 32% from their summer highs.

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But could that pullback be ending as of today? On Thursday, these stocks got a big boost following Taiwan Semiconductor Manufacturing's (NYSE: TSM) fourth-quarter earnings release in which TSMC forecast higher-than-expected capital expenditures for the coming year, supporting what it sees as a massive five-year growth cycle ahead.

TSMC's spending-palooza

TSMC is the most important manufacturer in the semiconductor manufacturing industry by far. While other chip manufacturers are trying to catch up with this market leader, TSMC currently has a near-monopoly on today's leading-edge semiconductor production, supporting the world's biggest chip designers, from Nvidia to Apple.

Thus, while these companies also have large memory businesses, a lot of their logic revenue comes from TSMC. And again, these stocks were down since summer as investors have come to wonder about the sustainability of the AI buildout. Additionally, non-AI semiconductor markets in PCs and smartphones have been somewhat lackluster.

However, TSMC's commentary on the future likely put many concerns to rest. TSMC management now predicts a near-20% compound annual growth rate (CAGR) for revenue over the next five years, from 2025-2029. Unsurprisingly, that overall outlook is bolstered by a predicted mid-40% annual CAGR for AI accelerators. TSMC noted that AI chips accounted for almost a mid-teens percentage of overall revenue in 2024, with that percentage set to increase significantly.

That growth of course will need to be supported by new semiconductor equipment, and TSMC forecasts reaccelerating its capital expenditures in the coming year to between $38 billion and $42 billion. That's up a significant 33% at the midpoint over the amount spent in 2024, and also well above the prior annual peak of $36.3 billion spent in 2022.

Needless to say, a 33% increase in capital expenditures bodes well for Applied, Lam, and KLA. Applied and Lam both make critical etch and deposition equipment for laying down and stripping away transistor materials. Because of the switch to gate-all-around transistors coming this year, as well as the advent of backside power delivery likely in 2026, both Lam and Applied are set to see an expansion of their addressable market, since these innovations require more intense etch and deposition steps.

Additionally, all of these meticulous manufacturing steps have to be measured for defects at every stage of the process. As the dominant market share leader in metrology and process control equipment, KLA should also see a benefit from TSMC's spending plans.

Semiconductor capital equipment stocks are great long-term holds despite volatility

Each of these semiconductor equipment vendors are excellent buy-and-hold stocks for the long-term investor. Not only is each correlated to the dynamic semiconductor industry, which should grow above GDP for some time, but these companies are also highly profitable and return lots of cash to shareholders.

The downside is that these stocks can also be highly volatile. After all, these names are down 20%-30% from their highs, and the semiconductor market hasn't even been in a traditional bear market.

But while these names are cyclical, the chip industry should continue to innovate and make new highs over time. So for investors who can handle 40% or larger drawdowns every so often, these stocks should be on their buy list whenever they dip. Today's strong move off their recent six-month lull is illustration of that.

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Billy Duberstein and/or his clients have positions in Apple, Applied Materials, KLA, Lam Research, and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends Apple, Applied Materials, Lam Research, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.