SweetBunFactory
It’s been a short while since I’ve up to date my ideas on Veeco Devices (NASDAQ:VECO), however since my final article on this small semiconductor capital tools firm, the shares have provided blended efficiency. Up round 19%, the shares have outperformed the SOX (not the perfect benchmark, however I’m not conscious of a devoted semi tools index), however lagged extra direct friends/rivals like AIXTRON (OTCPK:AIXXF), SCREEN Holdings (OTCPK:DINRF), to not point out bigger semi capital tools gamers like Utilized Supplies (AMAT) and Lam Analysis (LRCX).
Execution will likely be paramount, however I imagine there’s nonetheless an argument to be made for a bullish name on Veeco shares immediately. The corporate has been executing properly in laser anneal, together with a current win with a reminiscence chip producer, and can quickly ship analysis items for brand spanking new nanosecond anneal. Superior packaging nonetheless holds worthwhile long-term promise, and the corporate has arguably underappreciated leverage to development alternatives in areas like GaN and SiC chip manufacturing. With a good worth within the low $30s and a enterprise combine that ought to show considerably countercyclical, this can be a identify at the least value an extra look.
Focusing on New Progress Alternatives – The TAM Numbers Are Massive, However So Are The Opponents
One of many extra attention-grabbing developments within the yr or so since my final replace is how Veeco seems to be pivoting towards extra thrilling long-term development alternatives within the tools area – together with silicon carbide (or SiC) epitaxy and nanosecond anneal.
Veeco spent $30M (with an extra $35M potential earn-out) earlier this yr to accumulate Epiluvac and its know-how for SiC epitaxy (a technique of making use of silicon-based crystalline movies that enhance {the electrical} efficiency traits of the underlying wafer floor). SiC has been one of many hottest areas in semiconductors not too long ago (led by corporations like Infineon (OTCQX:IFNNY), onsemi (ON), and STMicro (STM) amongst others), as it’s a key facilitating know-how for automobile electrification (in addition to different superior high-voltage purposes like industrial automation, renewable energy and so forth).
With these underlying demand drivers, Veeco has quoted third-party analysis estimates of an addressable SiC epitaxy software market of $500M in 2027. There are “buts” although – there’s nonetheless no actual product at Epiluvac (an indication unit is anticipated earlier than year-end), and so there’s nonetheless product improvement and efficiency/acceptance danger, to not point out the chance that bigger corporations like AIXTRON and ASMI (OTCQX:ASMIY) will take the lion’s share of the obtainable market.
One other necessary rising alternative is in nanosecond anneal. A follow-on of kinds to laser anneal (the place Veeco has meaningfully improved its product high quality/efficiency over the previous few years), nanosecond anneal might assist facilitate rising approaches like bottom energy ship networks (a chip design strategy that routes energy provide on the again of a chip, bettering logic density and efficiency) and different 3D architectures, in addition to permitting for decreased interconnect resistance (necessary as architectures proceed to shrink).
I haven’t seen particular estimates of nanosecond annealing market alternatives, however given the challenges with interconnect resistance as chips change into ever smaller and the worth in various 3D buildings, I can see this know-how being an necessary facilitator for future main edge-chips. Analysis items for Veeco’s nanosecond interesting know-how ought to attain clients this yr and in 2024, presumably resulting in significant orders in 2025.
Veeco can be trying to repurpose and advance a few of its core ion beam deposition and etch know-how into new methods for purposes outdoors of EUV masks blanks and thin-film heads for disk drives. If these instruments carry out properly with low resistivity metals, it might create new alternatives for Veeco at further superior semiconductor nodes in 2025 and past.
Alternatives In The Core Enterprise Are Nonetheless Enticing
Veeco’s future isn’t tied to large wins with speculative new applied sciences/merchandise. There’s nonetheless a powerful core alternative in areas like laser anneal and MOCVD (metallic natural chemical vapor deposition), with the latter together with alternatives in photonics, microLEDs, and GaN/AsP chips (RF, energy, and sensors).
With laser annealing, the corporate has made arguably underappreciated progress in bettering the efficiency of its methods (together with throughput) and has each grown and stabilized its market share (previously, there could be important swings in market share between software generations resulting from efficiency points/enhancements). With that progress, Veeco has solidified its place at a number of steps with a number of logic clients and has not too long ago gained enterprise within the reminiscence area (a primary for the corporate). Trying forward, I feel it’s at the least believable that additional wins in reminiscence could possibly be attainable, and I’d notice that new architectures like gate-all-around (or GAA) would require the decrease thermal price range and decrease contact resistance that these instruments supply.
With MOCVD, I’m curious to see what the corporate can do in markets like photonics and GaN/AsP chip manufacturing. Whereas SiC energy gadgets get plenty of consideration, GaN particularly is prone to see important development within the coming years as properly, whereas photonics are essential to superior networking purposes. AIXTRON is a formidable competitor right here, so I’m holding my expectations low, however I do assume the corporate might have a bigger market alternative in instruments for GaN chip manufacturing than is at present appreciated.
I additionally imagine there are ongoing alternatives within the firm’s lithography methods for superior packaging applied sciences. Again-end packaging was a significant bottleneck for a lot of chip corporations in recent times, and superior packaging applied sciences stay an necessary possibility in producing higher efficiency from semiconductors.
The Outlook
I used to be anticipating 2023 to be a tougher yr for the semiconductor and disk drive industries, and it has been even rougher than I anticipated. With that, my expectations for 2023 and 2024 are decrease than earlier than (about 10% and seven%, respectively), however I do count on a stronger rebound in 2025, and I see potential upside if analysis items delivery out this yr and subsequent translate into significant orders for 2025 and past.
Long run, I feel Veeco’s pivot towards higher-growth alternatives (extra superior nodes and new markets like SiC) can drive long-term annualized income development round 6% to 7%. Hitting administration’s long-term margin targets (20% non-GAAP working margin on $800M in income) is extra of a “we’ll see”, however I do assume EBITDA margins within the 20%’s and free money stream margins within the mid-teens are attainable now within the good years. Ought to the corporate succeed with these newer merchandise (and proceed to develop the bottom enterprise) such that the general scale of the enterprise grows, I can see a path to sustainably greater profitability than what the corporate has managed previously, however it’ll at all times be cyclical.
I imagine Veeco is modestly undervalued on discounted money stream, and maybe extra meaningfully undervalued on margin-driven multiples-based valuation. If Veeco can the truth is get EBITDA margins into the low-20%’s on this coming restoration/up-cycle, a a number of of two.5x on FY’25 income (discounted again) can assist a good worth of $30.
The Backside Line
Placing plenty of religion into phrases like “it’s totally different this time” is an efficient solution to lose cash within the inventory market, however I do assume Veeco has turned a nook in multiple respect. My view is that the corporate is now not enjoying catch-up and being reactive and is as a substitute actively searching for development alternatives the place it might probably repurpose, develop, and/or purchase know-how that’s complementary to its current enterprise. It’s definitely attainable that tools demand gained’t rebound in 2024 as anticipated and/or that Veeco’s newer ventures gained’t succeed, however I feel immediately’s value nonetheless provides sufficient upside to be value additional due diligence.
Editor’s Word: This text discusses a number of securities that don’t commerce on a significant U.S. change. Please concentrate on the dangers related to these shares.
