Business still looks very good right now for a lot of chip equipment makers. But there's also a warning sign or two.
Earlier this week, two chip equipment makers -- Brooks Automation (BRKS) and Axcelis Technologies (ACLS) -- pre-announced March quarter revenue that topped prior guidance. Axcelis said it expects to report its revenue rose 29% to $118 million (above prior guidance of $115 million), and Brooks pre-announced revenue of $220 million, up 11% and above guidance of $213 million.
Moreover, on an investor call that followed his firm's pre-announcement, Brooks CEO Steve Schwartz said that while his firm's chip equipment business has dealt with some Asian supply chain disruptions, it's currently "in an extremely high demand environment with customers who are willing to take almost anything we could manufacture." He also asserted that the business is "in the middle innings of what we think is strong growth."
Likewise, in a Q1 report delivered on Wednesday morning, Dutch chip equipment giant ASML (ASML) reported that its bookings rose 121% annually to €3.09 billion, aided by growing orders for its cutting-edge EUV lithography systems and (more generally) Intel (INTC) and Taiwan Semiconductor's (TSM) strong capital spending.
ASML also declared that its demand outlook "is currently unchanged," and that it hasn't seen any order push-outs or cancellations. On its call, the company added that "logic" clients such as Intel and TSMC are still investing heavily in next-gen manufacturing processes, and that memory capex (down sharply in 2019) is starting to recover.
But on the flip side, ASML declined to provide any guidance for either Q2 or the whole of 2020, citing the "significant uncertainty" that COVID-19 has created for GDP growth, end-market demand and ASML's manufacturing operations and supply chain. The comments come three weeks after ASML pre-announced weaker-than-expected Q1 revenue due to COVID-19's near-term impact on its supply chain and shipments, while forecasting that the lost revenue would be made up in Q2 and Q3.
Meanwhile, several chip equipment makers headquartered in the Bay Area, including Applied Materials (AMAT) and Lam Research (LRCX) , have withdrawn their quarterly guidance, while citing the impact of the Bay Area's shelter-in-place orders on their operations.
Arguably, chip equipment makers are dealing with a pair of distinct risks right now.
The first one, which might be more short-term in nature, is that COVID-19 lockdowns disrupt investments planned by major chip manufacturers. That is, even if a particular equipment maker's operations aren't badly disrupted, the fact that a manufacturer can't get equipment from other suppliers that it's leaning on forces it to delay things such as fab expansions and manufacturing process upgrades.
The second and perhaps larger risk is that COVID-19's impact on end-market demand for products such as smartphones, TVs and cars, together with its potential impact on memory pricing (due to lower demand), eventually takes a toll on chip equipment capex.
It's worth noting here that it could take a little while for chip equipment demand to feel the effects of weaker end-market chip consumption, particularly at a time when inventory stockpiling appears to be propping up chip sales for some companies. Some equipment makers might only see orders slump after end-market weakness leads their customers to see chip order cuts and (in the case of memory makers) price pressure, and those order cuts and price declines lead customers to rethink their capex plans.
But either way, at a time when most chip equipment stocks have bounced sharply from their March lows, investors in these companies should stay mindful of both risks as earnings season proceeds.
