When it comes to the semiconductor industry, there are many areas of intrigue. Chip designers like NVIDIA (NASDAQ: NVDA) immediately come to mind, as well as fabricators like Taiwan Semiconductor Manufacturing (NYSE: TSM). The rise in Marvell Technology (NASDAQ: MRVL) shares over the past few months highlights the demand for customized chips. Another key area of this market is the companies that produce the equipment needed to actually put these chips together.
Fabricators like TSMC buy this equipment from firms that make tools for specific steps in the process. This places these firms near the beginning of the semiconductor value chain. As such, they feed into this complex ecosystem, which is an essential part of its proliferation. I’ll detail two semiconductor equipment stocks that may be gearing up for a big year in 2025. All return, valuation, and implied upside figures are as of the Dec. 11 close.
Tokyo Electron: Dominant Japanese Supplier Looks Undervalued Versus Peers
Tokyo Electron (OTCMKTS: TOELY) is one of the largest players in the semiconductor equipment industry but hasn’t had a great 2024. Shares have provided a total return of -1% on the year. The Japanese company specializes in making equipment for the deposition, coating/developer, etching, and cleaning processes within chip fabrication.
Manufacturers perform these tasks in sequential order. They are essential in creating smaller, more powerful, and more efficient chips. Tokyo Electron is the only company in the world that provides a comprehensive solution across these connected processes. Aside from this, every product it sells holds either the number one or number two market share within its segment. Its coater/developer equipment holds a 100% market share when integrated with ASML’s extreme ultraviolet lithography equipment. ASML (NASDAQ: ASML) holds an essential monopoly in this equipment, from which Tokyo Electron benefits.
Sales at Tokyo Electron are recovering in 2024, growing by 41% and 31% from the previous year in Q2 and Q3, respectively. The United States recently placed further restrictions on selling semiconductor equipment to China. But, it made explicit carve-outs for Japanese and Danish companies. This is huge for Tokyo Electron, as it gets over 40% of its revenue from China. It pays to be a U.S. ally.
The company has the lowest or second-lowest relative valuation among the world's top five chip equipment firms based on various valuation multiples. Combined with its recovering sales, dominant market position, and preferential treatment from the U.S. government, Tokyo Electron could take off in 2025.
Camtek: Small Fish Looking to Move Its Way Up the Food Chain
Camtek (NASDAQ: CAMT) contrasts greatly with Tokyo Electron in two key ways. The first is size. The company’s less than $4 billion market capitalization makes it a tiny player compared to those dominating the industry. The other difference is the type of equipment it makes. The company specializes in inspection and metrology equipment.
This refers to equipment that checks the chip-making process and measures microscopic dimensions to ensure product consistency. Camtek's largest competitor in making this type of equipment is the giant KLA (NASDAQ: KLAC). Camtek has seen strong sales growth through 2024 of over 30% each quarter. This has been accelerating, reaching 40% in Q3. It has also grown margins significantly. Last quarter, its adjusted operating margin was nearly 300 basis points higher compared to the previous year's quarter. However, over that same period, the company’s forward price-to-earnings (P/E) ratio has compressed by over 23%. This suggests a disconnect between the market's view of its competitiveness and its actual performance.
On average, the two recently released Wall Street analyst price targets on Camtek imply upside in the share price of 32%. The company’s revenues have around 50% exposure to increasingly important high-performance computing applications, a key contributor to this upside. However, two key risks stem from Camtek’s country of origin.
Camtek is an Israeli firm. Further escalation in the Middle East could negatively impact the company. At the same time, a resolution of tensions could benefit it. Along with this, Camtek gets a significant amount of its revenue from China. Israel is not on the exempt list of countries when it comes to the recent U.S. government restrictions on sales to China. However, markets have kept Camtek's shares flat since the announcement. This suggests they aren't overly concerned.
