AI And Next-Gen Semiconductors Will Create New Market Opportunities But China Risks May Pressure Margins

Key Takeaways

• Strategic investments in new semiconductor technologies and advanced packaging are expected to drive Veeco's future revenue and market growth.
  
• Veeco's focus on R&D and AI-related growth positions it to benefit from increased demand, boosting efficiency and potential earnings.
  
• Regulatory changes, increased competition, and market shifts in China and data storage pose significant risks to Veeco Instruments' revenue and profit margins.

Catalysts

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

• Veeco has shipped a next-generation NSA system to a leading semiconductor company and has agreements for evaluations with other key customers, expecting shipments in 2025. These moves indicate anticipated growth in revenue as new technologies are adopted.
  
• The company forecasts significant growth in its served available market (SAM) for annealing and ion beam deposition, as customers transition to new semiconductor technologies like gate-all-around and high-bandwidth memory. This expansion is likely to positively impact future revenue.
  
• Investments in advanced packaging and wet processing technologies position Veeco to benefit from increasing demand driven by AI and high-performance computing, which should contribute to future revenue increases.
  
• Veeco's strategic focus on R&D investments to expand core technologies aims to improve performance and reduce power consumption in devices, potentially increasing margin efficiency and revenue from next-generation manufacturing processes.
  
• With an expectation of AI-related revenue doubling by 2025, Veeco is positioned to capitalize on growth in the AI market, which is likely to drive earnings and revenue growth.

Veeco Instruments Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Veeco Instruments's revenue will grow by 4.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.3% today to 9.2% in 3 years time.
• Analysts expect earnings to reach $74.6 million (and earnings per share of $1.12) by about April 2028, up from $73.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.2x on those 2028 earnings, up from 16.0x today. This future PE is greater than the current PE for the US Semiconductor industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 2.29% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.39%, as per the Simply Wall St company report.

Veeco Instruments Future Earnings Per Share Growth

Risks

• Potential decline in China revenue due to decreased investment in mature node customers, which could present a significant risk to overall revenue and profit margins, as China accounted for 36% of 2024 revenue.
  
• Fluctuating demand in the data storage market, with an anticipated $60 million to $70 million decline in revenue in 2025, might negatively impact overall revenue growth.
  
• Increased competition and technology challenges in the semiconductor market could lead to execution risks in laser annealing and ion beam deposition, potentially impacting revenue and profit margins.
  
• Potential mix shift towards lower-margin advanced packaging systems could exert downward pressure on gross margins, as these systems typically carry lower margins compared to more traditional segments like China and data storage.
  
• Regulatory changes and export restrictions could negatively impact the company’s ability to conduct business in key markets such as China, potentially impacting revenue and net margins.

Valuation

• The analysts have a consensus price target of $29.571 for Veeco Instruments based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $35.0, and the most bearish reporting a price target of just $25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $811.2 million, earnings will come to $74.6 million, and it would be trading on a PE ratio of 32.2x, assuming you use a discount rate of 9.4%.
• Given the current share price of $20.3, the analyst price target of $29.57 is 31.4% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.