US China Trade Tensions And Rising Costs Will Erode Margins

Key Takeaways

• Geopolitical tensions, new regulations, and concentrated revenue streams expose Veeco to volatile costs, erratic earnings, and market-driven risks.
  
• Heightened R&D demands and supplier consolidation increase pricing pressure, potentially squeezing margins if customer demand or adoption patterns shift.
  
• Robust demand in AI and advanced packaging, deepening customer ties, and ongoing innovation position Veeco for strong, sustained growth despite industry headwinds.

Catalysts

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

• Intensifying trade and tariff tensions, particularly between the US and China, are already leading to delayed shipments and increased costs for Veeco, threatening both near-term and long-term revenue growth as a significant portion of sales and expected expansion depend on stable cross-border demand.
  
• Escalating sustainability regulations and environmental compliance requirements are set to raise manufacturing costs and restrict operational flexibility, squeezing gross and net margins over time as Veeco's product portfolio requires ongoing adaptation to regional environmental standards.
  
• Veeco's heavy revenue concentration in a handful of advanced AI, high-performance computing, and packaging growth initiatives creates an overexposed risk to cyclical overcapacity and abrupt shifts in customer investment patterns, potentially resulting in erratic revenues and earnings volatility once current demand peaks.
  
• A persistent need for outsized research and development investment to remain relevant against larger, better-financed competitors-combined with the risk that recent evaluation wins in edge technology nodes may not translate to full production orders-could suppress earnings and create periods of net margin contraction if product adoption slows or is bypassed by alternative techniques.
  
• Industry consolidation among semiconductor manufacturers and rising customer bargaining power will likely intensify pricing pressure, further erode Veeco's margins, and limit revenue upside as chipmakers seek fewer, more dominant equipment suppliers and increasingly shift toward alternative or in-house process technologies.

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 3.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 9.0% today to 7.7% in 3 years time.
• The bearish analysts expect earnings to reach $61.1 million (and earnings per share of $0.67) by about July 2028, down from $63.8 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 28.2x on those 2028 earnings, up from 19.7x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.9x.
• Analysts expect the number of shares outstanding to grow by 2.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.37%, as per the Simply Wall St company report.

Veeco Instruments Future Earnings Per Share Growth

Risks

• The accelerating adoption of AI, high-performance computing, and 3D chip packaging is creating strong demand for advanced semiconductor process equipment, positioning Veeco's key product lines in laser annealing, ion beam deposition, and advanced packaging as critical technologies, which could drive sustained revenue growth and margin expansion.
  
• Veeco's achievement as an official production tool of record and recipient of major customer awards from Tier 1 industry players like Intel demonstrates strengthened competitive position and deepening customer relationships, which can support recurring business and high-value incremental revenue opportunities.
  
• Management highlights that orders for advanced lithography and wet processing tools are expected to double advanced packaging revenue year-on-year in 2025, showing immediate and robust growth tied directly to AI-driven capacity expansions and enhancing overall earnings potential.
  
• The company reports successful penetration of new applications at existing customers and multiple ongoing system evaluations, each representing sizeable potential wins, which suggests meaningful pipeline visibility and a platform for substantial revenue upside as customers ramp up production over the next two years.
  
• Continued investments in product innovation, strong gross margins near guidance despite macro headwinds, and the ability to mitigate tariff cost pressures indicate Veeco's operational resilience and potential long-term improvement in earnings and net margins.

Valuation

• The assumed bearish price target for Veeco Instruments is $20.0, 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 $31.0, and the most bearish reporting a price target of just $20.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $789.8 million, earnings will come to $61.1 million, and it would be trading on a PE ratio of 28.2x, assuming you use a discount rate of 10.4%.
• Given the current share price of $20.97, the bearish analyst price target of $20.0 is 4.8% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
• 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.