AI And Digitization Will Drive Semiconductor Equipment Demand Despite Risks

Key Takeaways

• Unique technology and government incentives position Veeco for industry-leading market share growth, margin expansion, and less cyclical revenue through geographic diversification.
  
• Rising AI-driven demand and new applications in power electronics, displays, and quantum computing create robust long-term growth and recurring high-margin revenue streams.
  
• Heavy reliance on a few large, cyclical customers and slow adoption of new technologies expose Veeco to volatile earnings, shrinking revenue base, and increased competitive risk.

Catalysts

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

• Analyst consensus expects Veeco's next-gen NSA and IBD evaluation programs to support future growth, but given exceptionally strong and broad customer engagement, the momentum could drive an industry-leading expansion in market share, leading to a faster than expected acceleration in revenue and sustained premium margins-especially as multiple $30 million to $60 million follow-on orders per customer go from evaluation to high-volume production.
  
• Analysts broadly agree on increasing SAM for annealing and ion beam, but this likely understates the impact of AI and pervasive digitization, which could trigger an outsized, multi-year capital expenditure cycle across both logic and memory segments, positioning Veeco to consistently outperform semi equipment peers on both revenue growth and net income expansion.
  
• Veeco's unique technological differentiation in 300mm GaN-on-silicon MOCVD tools places the company at the forefront of electrification and next-gen power electronics for automotive, renewables, and data center infrastructure, setting the stage for new, high-margin recurring revenue streams to meaningfully impact both top-line growth and gross margins starting from 2026.
  
• With robust government incentives and subsidies for domestic semiconductor supply chain resiliency in multiple regions, Veeco stands to benefit from broader regional demand, enabling a geographically more diversified and less cyclical revenue base, while regulatory tailwinds reduce risks and enhance the visibility of long-term earnings.
  
• The ramp in Veeco's MicroLED, OLED, and quantum computing-related manufacturing equipment, combined with a rising mix of service and spares revenues as customers increase capacity utilization, supports both revenue diversification and an upward trajectory in free cash flow conversion and return on invested capital as early as 2026 and beyond.

Veeco Instruments Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Veeco Instruments compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Veeco Instruments's revenue will grow by 4.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 8.7% today to 8.1% in 3 years time.
• The bullish analysts expect earnings to reach $64.4 million (and earnings per share of $0.66) 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 bullish analyst cohort, the company would need to trade at a PE ratio of 45.2x on those 2028 earnings, up from 22.8x today. This future PE is greater than the current PE for the US Semiconductor industry at 27.8x.
• 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 11.04%, as per the Simply Wall St company report.

Veeco Instruments Future Earnings Per Share Growth

Risks

• Increasing international competition and ongoing global supply chain disruptions, amplified by evolving tariffs and import/export complexities, threaten Veeco's pricing power and could compress net margins and increase operational risks over the long term.
  
• The company's heavy dependency on a small set of large customers, especially within cyclical semiconductor and data storage markets, creates persistent revenue volatility and could lead to significant earnings fluctuations if any major customer reduces or delays capital expenditures.
  
• Execution risk in transitioning to next-generation technologies, such as advanced packaging, GaN on silicon, and nanosecond annealing systems, could result in lost market share and slower revenue growth if Veeco fails to keep pace with industry shifts or faces delays in product adoption.
  
• Declining demand for legacy products in mature segments like traditional hard drive equipment and outdated deposition systems is outpacing the ramp-up of new solutions, suggesting a structural erosion in Veeco's revenue base and pressure on operating margins.
  
• Increasing industry consolidation and the rise of alternative chip manufacturing techniques may weaken Veeco's competitive position, limiting its ability to maintain scale-driven cost advantages, and threatening its addressable market and long-term revenue potential.

Valuation

• The assumed bullish price target for Veeco Instruments is $30.0, which is the highest 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 bullish 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 bullish analysts, you'd need to believe that by 2028, revenues will be $798.5 million, earnings will come to $64.4 million, and it would be trading on a PE ratio of 45.2x, assuming you use a discount rate of 11.0%.
  
• Given the current share price of $22.94, the bullish analyst price target of $30.0 is 23.5% 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.