Geopolitical Tensions And Trade Wars Will Erode Semiconductor Margins

Key Takeaways

• Escalating geopolitical and economic pressures could increase costs and weaken revenue growth through supply chain, tariff, and industry demand challenges.
  
• Heavy reliance on a few major customers leaves Veeco exposed to earnings volatility and intensifying competition threatens its pricing power and market share.
  
• Strong positioning in advanced semiconductor and packaging technologies, expanding customer adoption, and diversification into new markets are likely to sustain revenue growth and enhance profitability.

Catalysts

Develops, manufactures, sells, and supports semiconductor and thin film process equipment primarily to make electronic devices.

• Intensifying geopolitical tensions and evolving global trade policies are likely to trigger more supply chain disruptions and recurring tariff-related cost increases, leading to sustained pressure on Veeco's cost structure and a reduction in net margins over the long term.
  
• Further global economic deceleration or adverse macro shocks could severely curtail capital expenditure budgets within the semiconductor industry and electronics end-markets, resulting in delayed or canceled equipment orders and significantly constraining Veeco's future revenue growth.
  
• Persistent dependence on a limited customer base, particularly large logic, memory, and storage manufacturers, exposes Veeco to pronounced earnings volatility as any shift in customer strategy or reduction of spending on advanced nodes may trigger abrupt and outsized drops in both order backlog and overall earnings.
  
• Inability to maintain competitive advantages against increasingly well-capitalized Asian equipment suppliers threatens Veeco's pricing power, making it more vulnerable to aggressive price competition and potential erosion of both revenues and profit margins.
  
• The ongoing industry shift toward vertically integrated device and foundry models by major semiconductor companies may reduce the need for outsourced deposition and etching equipment, shrinking Veeco's addressable market and impeding long-term revenue and earnings expansion.

Veeco Instruments Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Veeco Instruments compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Veeco Instruments's revenue will grow by 4.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 8.7% today to 8.3% in 3 years time.
• The bearish analysts expect earnings to reach $66.2 million (and earnings per share of $0.7) by about August 2028, up from $60.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.7x on those 2028 earnings, up from 23.6x today. This future PE is greater than the current PE for the US Semiconductor industry at 28.2x.
• Analysts expect the number of shares outstanding to grow by 5.95% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Veeco Instruments Future Earnings Per Share Growth

Risks

• Veeco's growing momentum in advanced packaging and leading-edge semiconductor technologies like laser annealing and ion beam deposition is driven by long-term secular trends such as AI, high-performance computing, and advanced memory, which are likely to support persistent revenue growth and robust gross margins.
  
• Expanding evaluations and adoption by Tier 1 DRAM and logic customers, along with a strong pipeline in 3D packaging, gate-all-around, and EUV mask blank production, position the company to capture large, high-margin opportunities with repeat follow-on revenue, which could lift both revenues and long-term earnings.
  
• The company's advancements and competitive positioning in compound semiconductors, particularly 300mm GaN on silicon and arsenide phosphide tools, are opening new markets like power electronics, solar, photonics, and data centers, potentially reducing cyclicality and providing additional sources of revenue diversification.
  
• Veeco's successful product upgrades and customer feedback highlight improved cost of ownership and differentiated performance, which could maintain or strengthen market share in the face of competition, thereby supporting sustained or improved operating margins.
  
• Positive secular trends such as the rise of AI, electrification, miniaturization in devices, and demand for advanced packaging are likely to continue boosting served available market growth for Veeco's enabling technologies, increasing the odds of top-line growth and broader profitability in the years ahead.

Valuation

• The assumed bearish price target for Veeco Instruments is $21.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Veeco Instruments's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $21.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $795.3 million, earnings will come to $66.2 million, and it would be trading on a PE ratio of 30.7x, assuming you use a discount rate of 10.9%.
• Given the current share price of $23.82, the bearish analyst price target of $21.0 is 13.4% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.