VECO: Merger With Axcelis Will Bring Execution Risks and Expanded Market Scale

Key Takeaways

• Overreliance on a concentrated customer base and exposure to policy shifts create volatility and risk for future revenue and earnings stability.
  
• Intensifying competition and cost pressures threaten margins, especially if demand for new technologies or product adoption is slower than anticipated.
  
• Strong product differentiation, market expansion, and innovation drive long-term growth, while regional challenges are offset by recurring revenue and robust demand in other key markets.

Catalysts

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

• Current investor sentiment may be overestimating the sustained demand and revenue growth from advanced semiconductor manufacturing equipment, as macroeconomic uncertainty, reduced capital expenditure from major chipmakers, and the risk of global trade tensions-including potential recurring tariffs and regulatory barriers, particularly in China-could materially slow new orders and end-market growth, leading to more volatile top-line results in coming years.
  
• Veeco's guidance and narrative reflect optimism about growth drivers such as AI, advanced packaging, and 3D architectures, but industry consolidation and increased bargaining power among large customers could put downward pressure on average selling prices and squeeze net and operating margins, particularly as competition intensifies both in legacy and emerging technologies.
  
• Despite recent strength in the semiconductor and advanced packaging segments, there is a notable customer and geographic concentration risk (e.g., a significant portion of revenue tied to China and a concentrated customer base), leaving future revenues and earnings highly exposed to cyclical investment decisions and policy changes by a small number of players, resulting in potential abrupt swings in quarterly performance.
  
• The timeline and magnitude of new product adoption in areas like GaN compound semiconductors and next-generation annealing technologies remain uncertain, with delayed customer pilot ramp-ups and possible R&D execution gaps allowing larger or more diversified competitors to capture market share, thereby limiting Veeco's potential top-line growth and gross margin expansion.
  
• Ongoing and possibly intensifying cost inflation from supply chain disruptions and tariffs-evidenced by current pressures on gross margin and persistent need for operational cost mitigation-could further erode earnings and net margins, especially if Veeco is unable to fully offset these headwinds through pricing power or product mix improvements.

Veeco Instruments Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Veeco Instruments's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.7% today to 8.4% in 3 years time.
• Analysts expect earnings to reach $66.0 million (and earnings per share of $0.61) by about September 2028, up from $60.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.4x on those 2028 earnings, up from 24.6x today. This future PE is greater than the current PE for the US Semiconductor industry at 33.5x.
• Analysts expect the number of shares outstanding to grow by 5.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.7%, as per the Simply Wall St company report.

Veeco Instruments Future Earnings Per Share Growth

Risks

• Sustained acceleration in AI and high-performance computing is driving robust, long-term demand for advanced packaging, laser annealing, and wet processing solutions-areas where Veeco has strong product differentiation and significant customer traction, supporting both top-line revenue growth and improved margins.
  
• Ongoing miniaturization of semiconductor devices and adoption of next-generation architectures such as gate-all-around, EUV lithography, and 3D memory are expanding Veeco's served available market (SAM), positioning the company to outperform overall wafer fab equipment (WFE) growth and enhance long-term earnings potential.
  
• Strategic investments in innovation, including next-generation MOCVD and NSA systems, along with expansion into compound semiconductors (e.g., 300mm GaN on silicon), are providing Veeco with a pipeline of high-value opportunities and diversification, which can drive sustained revenue and margin expansion.
  
• Growth in recurring revenue from services, aftermarket support, and installed base expansion is improving revenue predictability and supporting EBITDA growth due to the higher margin nature of these offerings.
  
• Near-term challenges in specific regions (e.g., China) are being offset by strong demand and revenue growth in other key markets (Taiwan, Southeast Asia, U.S.), driven by global digital transformation, 5G, and emerging applications like quantum computing, underpinning Veeco's long-term market opportunity and supporting future revenue and earnings resilience.

Valuation

• The analysts have a consensus price target of $27.0 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 $30.0, and the most bearish reporting a price target of just $21.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $782.0 million, earnings will come to $66.0 million, and it would be trading on a PE ratio of 39.4x, assuming you use a discount rate of 10.7%.
• Given the current share price of $24.81, the analyst price target of $27.0 is 8.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they 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.