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Names like Nvidia , Intel and Advanced Micro Devices often take center stage when analysts and investors talk chip stocks. Many of these companies have remained in the spotlight as markets hit sell-off mode, and more recently as potential beneficiaries of the Chips and Science Act aimed at boosting semiconductor production in the United States . That said, there are some lesser-known but important semiconductor equipment manufacturers assisting these bigwigs that are likely to benefit from production longer-term for patient investors, analysts and fund managers say. “If we want to further strengthen the U.S. competitive positioning in semiconductors we have to look at more than just the chip makers themselves,” says Stifel analyst Patrick Ho. “We’re gonna have to look at the ecosystem.” Looking beyond the popular semiconductor names Semiconductor stocks have sold off heavily this year as supply chain disruptions stretching from the pandemic persist and investors veered away from the tech sector as recessionary fears rose. As of Friday, the VanEck Semiconductor ETF tracking the industry has plummeted about 21% this year and sits more than 23% off its highs, although shares have bounced this week even after some semi names issued outlook warnings . With the passage of the CHIPS Act in focus, investors and fund mangers at this moment in time remain fixated on the main semiconductor beneficiaries, or those involved in creating chipmaking factories. However, investors should keep an eye on equipment-focused names like ASML , Lam Research and KLA Corporation poised to benefit longer-term, says Robert Pavlik, Dakota Wealth Management’s senior portfolio manager. To be sure, benefits to chip stocks and equipment makers will likely come a few years down the road as funding first needs to get distributed and plants need to get built, says Mehdi Hosseini, an analyst at Susquehanna International Group. What’s more? Lead times to order equipment and prepare for production could span between 15 and 18 months, he added. “If I’m manufacturing a plant, I don’t need to rush out and place my order for the machinery,” Pavlik said, “I’m not going to see a dramatic increase in order flow or revenue and income for a while, so as an investor why do I need to move into that space now.” In the long-term, Paul Meeks, a portfolio manager at Independent Solutions Wealth Management highlights ASML, the only maker of what’s known as extreme ultraviolet lithography machines (EUV) required in creating advanced chips. Among the equipment manufacturing name, both Lam Research and KLA each offer a differentiated part of the manufacturing process that chipmakers will rely on as the build up factories, while Applied Materials , another key member, delves in a swath of segments, Ho explains. At the highest level, KLA dominates process control or the idea of inspecting wafers for contaminants, while Lam Research remains a major player in the etching and deposition spaces, he says. Ho also sees value in Entegris , which participates in contamination control or preventing contaminates from damaging the wafers used in chipmaking. Investors may also want to watch companies like Jabil and Flex , which provide products to the equipment manufacturers, notes Fox Advisors’ Steve Fox. Hans Chung of D.A. Davidson also points to names like MKS Instruments providing the power supply systems used by many equipment makers. To be sure, while the CHIPS Act will undoubtedly boost production in the U.S, much of the upside to the industry has already been accounted for, according to Hosseini. In response to Covid-19 and the onset of supply constraints, the industry shifted focus toward diversifying and building more fabs in different countries, he explains, noting that the bill purely takes care of who provides the funding and localizes the production. “It helps with the funding, it helps with executing these plans, but the plans were already in our assumption,” he said. At the same time, Ho notes that many of these secondary players may not receive funding from the actual act, given that the outlined $52 billion can get eaten up quickly when building factories. Additional funding may need to come further down the road to support the equipment manufacturers, he added. “We have to be more competitive against what’s out there today and if we’re not I believe that this will be a really disappointing facet for U.S. technology because the semiconductor industry will continue to migrate to other regions,” Ho said.
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