Two weeks into earnings season, we've gotten reports from four major chip equipment makers, as well as from two of the three biggest equipment buyers and a pair of big memory manufacturers. And while some of the reports are more favorable than others, on the whole chip equipment investors have to like what they're seeing.
Amid a Friday market rally, several chip equipment firms, including Applied Materials (AMAT) - Get Report , Lam Research (LRCX) - Get Report and Teradyne (TER) - Get Report , outperformed the Nasdaq after Intel (INTC) - Get Report set a 2018 capital spending budget of $14 billion, plus or minus $500 million. That's soundly above reported 2017 capex of $11.8 billion, and stems from higher investments in both logic (processor) and flash memory production lines.
The outlook came a week after Taiwan Semiconductor (TSM) - Get Report , by far the world's large chip contract manufacturer (foundry), set a 2018 capex budget of $10.5 billion to $11 billion, basically flat with reported 2017 capex of $10.9 billion. On the earnings call, CFO Lora Ho also said TSMC's capex during "the next few years will remain at a similar level to what we have spent last year and what we expect to spend this year," as it offsets big investments in next-gen manufacturing processes with better capital planning and productivity gains.
Samsung, the other top-3 equipment buyer, delivers its Q4 report on Jan. 31. In October, Samsung forecast it would spend a whopping KRW29.5 trillion ($27.7 billion) on chip capex in 2017, more than twice the $11.3 billion it spent in 2016. It suggested NAND flash and (to a lesser extent) DRAM investments would drive the spending. Samsung's capex is expected to drop a bit in 2018, but still remain at elevated levels.
Around the time that Intel reported, top-5 equipment maker KLA-Tencor (KLAC) - Get Report beat its December quarter estimates on the back of strong demand from memory makers, but offered roughly in-line March quarter and calendar 2018 sales guidance. KLA did note that its full-year outlook, which calls for high-single digit sales growth, is above industry forecasts for a mid-single digit increase in global wafer fab equipment (WFE) spending. After opening lower, shares closed fractionally higher on Friday.
A day before KLA reported, Lam Research beat estimates on the back of 37% revenue growth -- memory was the main driver -- and offered March quarter guidance that was soundly above consensus. Notably, Lam also said it expects low-double digit 2018 WFE growth thanks to higher DRAM and logic spending. That's both above KLA's forecast and contrasts sharply with a summer Gartner forecast for WFE spend to be roughly flat in 2018, following 17.9% growth in 2017. Nonetheless, Lam's shares, which had risen over 80% during the prior 12 months, saw some profit-taking following its report.
Chip test equipment maker Teradyne and top lithography equipment maker ASML (ASML) - Get Report also reported on Wednesday. Teradyne sold off after beating estimates but issuing light Q1 guidance -- the company blamed order timing issues involving clients servicing mobile chipmakers -- but recovered all its losses on Friday following Intel's outlook and upbeat analyst commentary.
ASML beat estimates with the help of 34% revenue growth, and -- thanks in part to 10 orders for cutting-edge EUV lithography systems -- also reported its net bookings rose 86% to €2.94 billion. The company's Q1 sales guidance was below consensus, something blamed on the pull-in of some orders into Q4, but it also forecast revenue would rise sequentially during each of the following three quarters with the help of the EUV ramp and strong demand from both memory and logic clients. Shares fell slightly post-earnings (they were up nearly 70% over the prior 12 months), but more than recovered their losses on Friday.
Korean DRAM/NAND maker SK Hynix also had some upbeat news for equipment makers. The company beat estimates and -- amid a recent spate of worries that the memory industry's boom cycle will soon be ending -- offered upbeat commentary about 2018 demand. And while Hynix said it's still prepping its 2018 capex budget, it did forecast capex would rise from a healthy 2017 level of KRW10.3 trillion ($9.7 billion).
For its part, Western Digital (WDC) - Get Report , which became a big-league flash supplier through its 2016 acquisition of SanDisk, joined others in suggesting recent NAND supply constraints would ease, as giant investments in 3D NAND production lines drive a 40%-plus increase in industry bit supply. But it also insisted such easing was nothing to be worried about, given strong demand trends and the potential for lower prices to increase flash penetration rates in various markets. Western doesn't directly spend massive sums on flash capex, since it relies on flash manufacturing joint ventures with Toshiba that operate out of Toshiba fabs.
Overall, January's earnings reports provide fresh reasons to think 2018 chip equipment spending will be better than it was expected to be in the spring and summer of 2017. Though industry growth will likely slow a bit from last year's impressive levels, it should still be meaningful, just as long as the wheels don't fall off for the memory industry.
And for many equipment makers, the operating leverage within their business models will allow earnings growth to be stronger still.
This column originally appeared on Real Money, our premium site for active traders. Click here to get more great columns like this.
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