[0:00]sponsor of today's video is fiscal.ai. Of course, we use fiscal data in all of our videos and over on chipstockinvestor.com.
[0:11]And you can get 15% off of any paid plan with our unique link fiscal.ai/csi. We'll use a couple charts from fiscal today. Stay tuned, you'll see some like this one right here comparing the revenue breakdown of the Fab Five. We call them the Fab Five, ASML, Applied Materials, Lam Research, Tokyo Electron and KLA Corp. We'll break it down and what happened to make this a thing over the course of the last 20 years. And more importantly, what's happening right now in the world of Wafer Fab equipment. That's fiscal.ai/csi. Check it out in the description below. It feels like we haven't talked about the Fab equipment choke point in the semiconductor industry flow for a while. In general, we've talked about a few specific companies, especially Lam Research just recently, but one of the reasons we haven't been talking about it as a general whole is that there's a lot of worry that maybe these companies are too expensive. And maybe that's the case, but where could an investor diversify their portfolio if not into companies like these at the choke point of the semiconductor industry? There's another industry with a lot of overlap with Fab equipment. Tell me, tell me more. Oh, you're not going to tell me more. Not yet. And when we're talking about Fab equipment, this is primarily the area that we're talking about in the semiconductor manufacturing process. Are these companies overpriced in general and how can we diversify if you find yourself with too much exposure to these? This is interesting because there is still a lot of merger and acquisition activity going on right now, so maybe things are not completely outrageously overpriced yet. This is the dynamics for the Axcelis plus Veeco merger.
[2:07]They're in the final approval stages, they're just waiting on approval from China. Second half of 2026, so possibly in just a few months, this is done. Now, even with these companies combined, they're not going to be raking in the Fab Five. It's not going to be that type of company. Especially because this is 2024 revenue. By the time they merge, it's going to be more like one and a half billion in sales, not 1.7 billion. And we did call out Axcelis being a potentially cheap company a few times last year. It's not cheap anymore, but you might want to hold if you already own it. It'd be a nice diversified company. So we're still talking about mergers and acquisitions. Here's another interesting one that we want to point out. Onto Innovation and Rigaku. What is Rigaku? X-ray imaging, but not like an X-ray for people, if you've ever broken arm or whatever, not that type of X-ray. This is more like industrial X-ray imaging, including emerging use cases for semiconductors. And especially if you start thinking about the 3D stacking of features within chips, or the vertical 3D stacking of chips on top of each other, how do you do quality control after that thing has been finished? X-ray imaging. Onto Innovation has this optical critical dimension metrology. OCD. So they acquired 27% of Rigaku stock behind basically a subsidiary of The Carlyle Group. And an ad hoc tie-up where customers could use that X-ray imaging and then do analytics on it using Onto's platform. Pretty cool stuff. I saw some commentary on Onto, they issued some notes, some convertible debt to help fund that acquisition of the stock, which you can see here, they now own 27% of Rigaku, behind basically a subsidiary of The Carlyle Group. And is Onto Innovation wildly overpriced? Of all the portions of the wafer Fab equipment out there, I feel like metrology is one of the more durable segments because they don't just sell the equipment. They have a really high percentage of recurring service revenue. They have lots of software that they sell to their customers. Metrology is still an interesting spot even though stock prices are elevated, the valuations are elevated, Onto is still an interesting one to us here. And I like these kind of more creative acquisitions. It's not an outright acquisition, but they get the partnership tied up with some equity, circular relationships. And then we'll just call out one more here, another creative way a merger and acquisition can happen. Onto bought a small equipment segment from KULicke and Soffa at one point. Yes, last year. And then Applied Materials announced a few weeks ago that they're buying the NEXX business from ASM PT. And who's ASM PT? Formerly part of ASM International, a former parent company of ASML, part of that partnership that ASM International had with Philips many years ago, that kind of created all these different companies with the ASM name in it. ASM PT, ASM Pacific Technologies, but this is basically the Asia segment of ASM that does a lot of advanced packaging equipment. And this purchase that Applied Materials made, it's for deposition on panel level substrates, the squares. Not the circles, square panels. There's, yeah. Next big thing. But another creative one where we have started to see a lot of merger activity the last couple of years, especially in this market. And instead of these companies like Applied Materials that would definitely run into anti-trust issues, if they tried to buy the whole company outright, just saying, hey, maybe we can just buy this little tiny segment of your business that you're not doing much with, it's struggling. But we can sure use it. Applied Materials very much into deposition equipment. So, hey, ASM PT, can we take that off your hands? It's cautious M&A, so it's not like these companies are seeing amazing deals out there to be had. But obviously enough value that they're willing to throw some cash around to go out and consolidate more industry market share to themselves. If you're trying to get acquainted with this part of the industry, this is who you want to start learning about. These five companies right here: ASML, Applied Materials, Lam Research, Tokyo Electron, and KLA Corp. KLA being the biggest of the metrology companies that still interests us the most of all the different sub-segments within this. And this is why you would want to be interested in these five companies right here. This is an epic 20-year run. Yeah, this is total revenues for those five companies. They still control about 70% of annual Fab equipment spending. And the stocks are up because 2026 and 2027 are going to be record revenue years for these companies. But what about beyond that? Beyond 2027? Oh, hey, we talked about this when we did ASML last month. Oh, yeah. Tell me about it. So there could be a hiccup around 2028. This is not necessarily going to be like a bear market or anything, but maybe some sort of mid-bull market cycle downturn for semiconductors. That's not unheard of. That happens all the time for the semiconductor market. The cycles tend to be very fast for this type of equipment. Beyond that, through the end of the decade, the expectation is that the semiconductor market does continue to grow. That is ultimately what TSMC was saying with some of their recent commentary was the demand from their end market customers is we're going to need a lot more semiconductors for the next three to five years. Please keep expanding Fab capacity. It's not going to be in a straight up and to the right line. But overall, the average appears at this particular point that it will be definitely on average up into the right with some bumps in the road. So if you didn't miss out on the Fab Five, or any of the wafer Fab and packaging equipment companies, one method that you could use is nibble now and then wait to buy more later when there are inevitable volatility to the downside events. Or you could do something like a DCA. Maybe we should talk about the next segment related to all of this if you need some diversification in your portfolio beyond just the semiconductor supply chain. Because there are other options that are related, that kind of bump up to and overlap with the Fab Five and the wafer Fab equipment companies. Here's Casey's list of these companies. Do we have a catchy name for this like the Fab Five? I wanted to stop at four, so we could call it the four tops. But we can't stop at four. You added three more. But we'd leave out Agilent if we just stopped at four. I think we call it the Lab Seven. Here's the Lab Seven. Okay, we're going to go with it. This is your domain. Remember, Casey, the healthcare expert. So, explain what these are. Yeah, you may not think about this as much of a related industry, but it is life science, chemistry, lab equipment providers. In fact, a lot of these companies have some semiconductor equipment or testing equipment or solutions, perhaps. This list is not exhaustive, obviously, and excludes healthcare and health tech devices used in in-market patient care. If you're watching this and you're thinking, well, actually, this company does provide this patient device or whatever. It's possible that a company like Thermo Fisher, they do provide patient devices, but these companies primarily fit into the lab equipment providers. Laboratory capital equipment and consumables as well. That's what we were looking for in this list. A combination of both. So you can think of both the razor and the blades analogy. The capital equipment, the razor device that you keep for a long time, and then the blades that you keep purchasing to fill up the thing when the old blade gets dull. Thermo Fisher has a small metrology and chemicals classification equipment segment. Merck and Bruker both provide chemical and Fab equipment. And there's an interesting story about Merck. You want to tell it really quickly? Oh, yeah. If everybody likes business history, we do, that's why we had Jacob on last month, Jacob Goldstein, to talk about business history. Merck is an interesting one because it's like a multi-century old business based in Germany. And this Merck is not to be confused with Merck and Co in the US, the pharmaceuticals company. This is the original Merck based in Germany. The OG. The OG Merck in Germany that we're talking about here. What happened is after World War I, this Merck on this list had a US subsidiary business that the US seized as enemy property after World War I, and it became Merck and Co in the US. And then the remaining Merck for the rest of the world still operates as Merck, but when it operates in the US, it has some other brand names like EDS Electronics, I think their electronics, chemicals and equipment business in the US. So that's this Merck that we're talking about here. Really interesting company because it's like lab and life science, but a lot of the lab equipment is for semiconductor and electronics labs and also some chemical delivery systems and whatnot. If any of that interested any of you, probably not. That's who this Merck is. They will point out Agilent, they are a spin-off from HP from 2000, and they spun off Keysight, a metrology company. Revvity used to be called my favorite company name ever, PerkinElmer. Have you used some PerkinElmer equipment in your past career? Before they divested their applied food and enterprise services business to a private equity firm, and then they rebranded as a much cooler name, Revvity. Cooler logo, too. Bruker, also life science, but also a lot of metrology lab equipment also for the semiconductor industry there in Bruker. So, lots of M&A happening. Thermo Fisher is a notorious acquisition company. Yeah, M&A hungry. We're going to start building out a healthcare supply chain. For starters, it won't be as robust as the semiconductor supply chain. But the parallel with the semiconductor supply chain with healthcare is these companies harbor the same position as the Fab Five and the wafer Fab and test and packaging equipment. These are kind of that to the healthcare industry. I don't know that they control the same amount and level of IP as the Fab equipment because these guys don't really do manufacturing processes. It's more like R&D enablement. So it's not a complete apples-to-apples comparison, but overall, the parallel is definitely there. It would harbor the same spot in the supply chain. And in the past, there has been a lot of overlap between the two groups of companies, and there still is overlap. We could actually see these companies kind of reconverge as time goes on. Why could life science equipment begin to converge with the wafer Fab equipment companies? One big hit, I think, is Onto Innovation doing something like taking an equity stake in Rigaku, an X-ray company. Or even like Cadence Design Systems making that open eye scientific acquisition a few years ago for molecular simulation. Here's the Lab Seven by revenue over the last 20 years. For many years, these companies were similar to Fab equipment. This chart only goes back to 2007, but there was some steady compounding growth there, but then after the pandemic, they've really struggled and the revenue's fallen or gone flat. And this is why we're looking at these again because long-term, we think that the semiconductor equipment industry could start to converge in a way with something in this area because of the overlap. And you can also see the little tail there at the end where maybe the revenue has troffed and they're starting to get past the boom period of 2021, 2022 and then the subsequent bust. So maybe they're back to normalized growth. Also, these companies, especially Thermo Fisher, they acquire like no one's business constantly. Every year there's a multi-billion dollar acquisition. Another reason why they kind of had this period of boom bust. Thermo Fisher comes to mind specifically because right at the tail end of 2021, like $17 billion acquisition of a Pier PD, I think it was. Obviously, the wrong time. If you want some diversification in your portfolio because you feel like your semiconductor heavy, maybe some of the M&A activity makes you a little bit nervous, happening in the Fab equipment companies. Here's the historical precedent for why you might want to at least just be a little bit cautious here and maybe be a bit more diversified in your capital equipment portion of your portfolio. Make sure you check out chipstockinvestor.com and fiscal.ai/csi. Again, that gets you 15% off any paid plan. And make sure you sub to our channel. We put out great research here on YouTube and over on our website. See you again here soon, but before you go, check out this video right here on ASML.
