Chip-equipment stocks received a big confidence boost late Tuesday when Intel ( INTC), the world's largest chipmaker, set a capital spending budget far above what most analysts expected. And the gift-giving has only begun, as Samsung, the second-largest chipmaker and the industry's largest spender last year, likely will announce its spending plans on Friday. But analysts say investors shouldn't necessarily mistake the ramp-up from the top two makers as a turnaround in the broader chip industry. Intel's projections were enough to launch the stocks of most chip-equipment makers, with Applied Materials ( AMAT), Novellus Systems ( NVLS), KLA-Tencor ( KLAC) and Lam Research ( LRCX) all advancing. This group of stocks has been pummeled lower since the end of 2003 and was excluded from last year's second-half rally that lifted so many chipmakers to multiyear highs. Investors didn't see the point of wading into the equipment providers if they weren't going to reap the benefits of chipmakers' spending plans. Indeed, most industry analysts haven't predicted much in the way of increased spending. On Monday, the equipment industry's primary trade group forecasted that global equipment spending would fall 5% in 2005 from a year earlier. However, initial reactions seem to indicate a belief that Intel's announcement has thrown off those projections with its new budget, which targeted spending in 2005 between $4.9 billion and $5.3 billion, an increase of up to 39% from 2004. But analysts continue to stick to their weak spending projections for the industry. Samsung is expected to cut its spending from around $4.9 billion in 2004 to roughly $4.5 billion this year. "Intel obviously exceeded expectations, and Samsung is still very healthy, but there's going to be certain chipmakers that are going to have significant declines," said Patrick Ho, a semiconductor and chip-equipment analyst with Moors & Cabot.
That means that for the immediate term, the news flow for the equipment makers could be mostly negative. "Intel will probably be one of the few pieces of good news to come out in the next few weeks," said analyst Suresh Balaraman with Think Equity Partners. "We still expect most other chipmakers to scale back their capital spending and expect many equipment companies to guide down orders for the first quarter." Ho said that foundries, as a group, most likely will cut their capex budgets in 2005 from 2004, noting that United Microelectronics ( UMC) could cut its 2004 capital expenditures by more than half. China-based foundry Semiconductor Manufacturing International ( SMI) also will likely shave its capex by more than 50%, from around $1.8 billion to between $500 million and $750 million; and No. 1 foundry Taiwan Semiconductor Manufacturing ( TSM), too, could reduce its expenditures. The verdict: Spending by the semiconductor industry overall likely will remain weak in 2005. Despite the bleak outlook, there will be beneficiaries, especially where Intel's dollars are concerned. "Ninety percent of our spending will be targeted at 65 nanometers," Intel CFO Andy Bryant said during a conference call late Tuesday after the company reported
financial results. (Most semiconductors are built with transistors spaced 130 nanometers or 90 nanometers apart. The next technology node is at 65 nanometers. The tighter the spaces in between transistors, the faster and more efficiently semiconductors can operate. At the same time, manufacturing complexity grows as chip size shrinks.) The following companies are Ho's picks for the companies that will benefit the most from Intel's spending on 65-nanometer technology: Applied, KLA-Tencor, Varian Semiconductor Equipment ( VSEA), ASML ( ASML) and Credence Systems ( CMOS). At American Technology Research, analyst Bill Ong offered his top 65-nanometer picks: Applied, Novellus, KLA, Mattson Technology ( MTSN) and Credence Systems. Ong noted that Mattson recently won a designation as the process tool of record for flash memory at Intel for its 65-nanometer process. "That could help them continue to build their presence there," he said. According to Balamaran, most spending by chipmakers for the next two years will be at 130 nanometers and 90 nanometers, making the race for the best position at 65 nanometers mostly a small issue. "Except for Intel, production at 65 nanometers is a dream for most other chipmakers," he said.