Bonnie Wang
the next Fico Tools (Nasdaq:FICO) It has admittedly been a frustrating exercise at times, as this small player in the cutting-edge tooling of semiconductor manufacturing is often overlooked by the Street. Since my last update, shares are up about 65%, which is not Bad compared to Applied materials (deaden), Extron (AIXXY), or the broader semiconductor space, but it still lags behind its ilk ASM International (OTCX: My name is) And Screen Collectibles (OTCPC:DINRF).
At this point I’m still bullish on Veeco. I believe the company is on the cusp of a significant revenue increase on the back of new groundbreaking tools, not to mention somewhat longer-term opportunities in areas like silicon carbide and GN-on-silicon. Management has a good track record of reusing and improving existing technologies to provide new market opportunities, but I would like to see this translate into improved profitability over this next cycle.
Valuation The companies in the semiconductor production equipment (or SPE) market are never completely clear, but compared to what the market paid for the growth and margins I expect from Veeco over the next couple of years, I think there’s still upside potential here.
Leading nodes drive the following opportunities
Two of the best opportunities I see for Veeco right now are nanosecond annealing and ion beam deposition (or IBD) for low-resistance metals.
Demand for advanced annealing may rise
Both are of interest to manufacturers looking to achieve more performance from increasingly elaborate architectures, where nanosecond annealing should be a key tool/process for facilitating back-end power and end-to-end gating. Back-side power delivery helps reduce voltage drop from the resistance (by directly conducting power and shortening the travel distance), as well as electrical migration, while reducing noise, interference and power consumption, while the overall gate has advantages such as better electrostatic control, reduced leakage currents, Improve design flexibility.
While it’s difficult to make “apples-to-apples” comparisons, and I’m by no means an electrical engineer, back-end power and GAA seem to be able to drive 10% to 30% power efficiency improvements, which is significant in itself and rules out Other benefits such as thermal performance and scalability. I’d also like to point out that there may be longer-term opportunities for nanosecond annealing outside of chip production – a relatively recent paper suggests that nanosecond annealing could lead to better electric car batteries, and this wouldn’t be the first time the technology has been developed Veeco for one market found use in another.
Veeco has enjoyed a healthy period of leadership in progressive laser annealing (increasing share in laser annealing specifically and overall annealing) and I believe this leadership will continue with the move to nanosecond annealing. I’m not discounting competitors like Screen Holdings, but Veeco already has evaluation tools with two leading logic companies, and commercial orders in late 2024 or 2025 are certainly possible.
Management recently updated its forecast for the market served in laser annealing to $600 million in 2024 (from about $500 million recently and $300 million several years ago) and $750 million in 2027. Furthermore, management has boosted It forecasts the opportunity for nanosecond annealing to reach $450 million in 2027 (from previous estimates of about $350 million). Since Veeco has long enjoyed a significant market share in laser annealing (it has grown from about 60% at the time of the Ultratech deal to more than 70% today), I like Veeco’s chances to capitalize on demand for nanosecond annealing tools over the next three to five years. Years of customers like TSMC (TSM).
New opportunities for core IBD capabilities
Veeco is also looking to expand opportunities for its core IBD technology. Veeco is already used to making blank masks for UV lithography, and is looking to expand into disposing granules (essentially films that are mounted on photomasks to improve productivity and defect rates).
However, the most interesting opportunity could be in Veeco IBD’s new tools for front-end semiconductor production; Specifically for depositing low-resistance metals such as tungsten and ruthenium. Tungsten and ruthenium (as well as cobalt) both have advantages over copper for use as interconnects below 7-10 microns, but the deposition process requirements are different creating an opportunity for Veeco to sell IBD tools in front-end semiconductor manufacturing. practical.
Management believes that the deposition of low-resistance metals could represent a $350 million opportunity for Veeco over a relatively short period of time (three years or so). While I expect more competition in this space, Veeco’s experience here (IBD tools are used for UV mask blanks that deposit ruthenium, among other materials) could be valuable in winning some tool orders from customers.
Older opportunities could still contribute, while China is a complex driver
I expect emerging opportunities in nanosecond annealing, additional laser annealing steps, and front-end IBD to be the major talking points over the next 12 to 18 months (particularly with regard to announcements of evaluation unit placements and commercial unit orders), with other, older opportunities still Worth watching.
Photonics remains a growth opportunity for Veeco with its MOCVD instruments; Although AIXTRON is still the dominant player here, the VCSEL market continues to grow and demand for instruments increases. Management also continues to work on its silicon carbide layer tool, and there remain significant opportunities in GaN-on-silicon wafer production. With higher breakdown voltages, superior thermal performance, and higher electron mobility (which typically means better device performance), GaN-on-silicon will likely see increasing adoption in applications such as power electronics (including inverters used in renewable energy, electric vehicles, and data center ). power supplies) and RF amplifiers (used in communications equipment).
Furthermore, there are still long-term opportunities in microLEDs (a slow-developing market so far) and data storage. With HAMR (heat-assisted magnetic recording) offering increased data storage capacity but also requiring more complex drive heads with an increasing number of deposition steps, this will remain a worthwhile market for Veeco (in which it has a controlling share) for some time to come.
Admittedly, China is a more complex topic. With Veeco generating more than 30% of its revenue from Chinese customers last year, there is clearly a risk if Western governments crack down on technology sales to China. On the other hand, though, many companies and countries are looking to “fortify” their supply chains in China, and that means increased capex growth in older nodes where Veeco can sell laser annealing tools, other lithographic printing tools, etc. .
Expectations
I was higher than my 2023 revenue forecast when I last wrote about Veeco (which Veeco later beat), and I think the story has gotten stronger since then; I don’t expect 2024 to be a great year for SPEs, but I do think there will be stronger growth and ramp in 2025 and 2026 as manufacturers move forward in capital spending to drive next-generation chip production. I’m looking at ~8% growth in FY24 (essentially in line with the Street), but I believe Veeco can outperform current expectations in 2025 and 2026 as nanosecond annealing and low-resistance deposition orders are achieved.
Finally, I’m modeling high single-digit annual revenue growth (8%+) over the next five years, and I’m not ruling out double-digit growth. I’m less confident about margin development, but I think non-GAAP adjusted EBITDA margins could move to the low to mid 20% as revenue accelerates. This, in turn, should translate into double-digit free cash flow margins.
But evaluation is not that simple. It’s hard enough to value deep cyclical companies like SPEs on discounted cash flow, and the Street tends to favor forward-looking P/E. To that end, a forward multiple of 22.5x on my FY25 EPS estimate of $2.30 puts me at more than $50 for fair value, and I don’t think 22.5x is out of line considering companies like Applied Materials, Kosovo Liberation Army (KLAC), and L Research (LCRX) is being traded. I’d also point out that although few analysts value the stock this way, there has been a very reliable historical relationship between EBITDA margin and forward revenue multiples; If Veeco can get margins in the mid-20%, a fair value in the high $40s isn’t unreasonable.
Bottom line
With semiconductor equipment stocks like Veeco already enjoying a strong rebound, I can understand if investors don’t want to push their luck – especially when it takes fairly strong assumptions/multiples to arrive at attractive fair value. However, success in new markets such as nanosecond annealing and IBD for low-resistance metals and the continued growth and maturation of markets such as GaN-on-silicon could lead to an underappreciated upside, and I believe more aggressive investors still have reason to consider this name. .
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