AI computing power and storage demand are expanding wildly! Semiconductor equipment is ushering in a super cycle, kicking off a new bull market.

Top investment firm KeyBanc Capital Markets on Wall Street recently released a research report stating that the global semiconductor industry is expected to experience a more robust year of demand. The report specifically points out that semiconductor equipment manufacturers will benefit greatly from the trend of AI chip infrastructure construction and the "storage chip super cycle" macro background. They will be the biggest beneficiaries of the rapid expansion trend of AI chips (including AI GPU/AI ASIC) and DRAM/NAND storage chip production capacity. Another Wall Street giant, Citigroup Group, also recently released a report showing that the semiconductor equipment sector is one of the biggest winners under the explosion of AI processing power and storage demand. In this report, Citigroup predicts that the global semiconductor equipment sector will enter a "Phase 2 Bull Market Cycle," indicating that after the super bull market of 2024-25, it may usher in a new round of bull market trajectory. The report from Citigroup suggests that the main investment strategy for semiconductor stocks in 2026 is not simply "broadly bullish on semiconductors," but rather specifically focuses on the semiconductor equipment industry leaders in the stock market (such as ASML Holding NV ADR, Lam Research Corporation, and Applied Materials). As Microsoft Corporation, Alphabet Inc. Class C, and Meta, among other tech giants, drive the global development of super-large-scale AI data centers, the semiconductor manufacturing giants are accelerating the expansion of their production capabilities for advanced AI chips with process nodes of 3nm and below, as well as CoWoS/3D advanced packaging capacity, and DRAM/NAND storage chip capacity. The long-term bull market logic for the semiconductor equipment sector is becoming increasingly robust. The World Semiconductor Trade Statistics Organization (WSTS) recently published the latest outlook data for the global semiconductor industry, indicating that the trend of expanding chip demand is expected to continue to be strong in 2026. Following a strong rebound in 2024, the global semiconductor market is projected to grow by 22.5% in 2025, reaching a total value of $772.2 billion, higher than the outlook provided by WSTS in the spring. By 2026, the total value of the semiconductor market is expected to significantly expand to $975.5 billion on the basis of the strong growth in 2025, approaching the market size target of $1 trillion by 2030 set by SEMI, which means a year-on-year increase of 26%. WSTS believes that this continuous strong growth trend for two consecutive years will mainly benefit from the dominant sectors of logic chips led by AI GPU/TPU and the strong momentum in the storage sector dominated by HBM storage systems, DDR5 RDIMM, and enterprise-level SSDs. Expecting both sectors to achieve incredibly strong double-digit growth, thanks to the continuous robust expansion demand in areas such as AI inference systems and cloud computing infrastructure. As the wave of chip manufacturing capacity expansion begins and semiconductor equipment manufacturers win big, the demand for DRAM/NAND storage chips continues to be strong, with prices for these storage product series (such as DDR4/DDR5/enterprise-level SSDs) showing a brutal expansion trend. This is primarily due to the surge in demand for storage chips driven by the AI processing power surge and the increasing importance of storage chips for AI training/inference systems. The current global AI processing power demand is showing an exponential growth trend, with supply falling far short of demand intensity, as evidenced by the exceptionally strong revenue data released by the "world chip king" Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) on Thursday. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR saw its gross margin exceed 60% in the fourth quarter, beating expectations, and is expected to achieve a revenue growth rate close to 30% for the full year 2026. The company also significantly raised its capital expenditure guidance for 2026 to $52-56 billion, far exceeding market expectations. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR is seeing unparalleled demand from data center AI chips and is on track to potentially achieve a 50% compound annual growth rate in revenue for its chip foundry business related to AI, up from the previous forecast of the "mid 40s." This globally significant chip manufacturing giant's robust performance and future guidance drove a collective surge in chip stocks on Wall Street on Thursday, especially in the storage chip and semiconductor equipment sectors. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's capital expenditure expansion is mainly focused on the purchase of various high-end semiconductor manufacturing equipment covering lithography, etching, thin-film deposition, advanced packaging, testing, and other high-end chip manufacturing processes. Market expectations for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's strong chip manufacturing capacity expansion are not only focused on the massive orders for AI chips in data centers from NVIDIA Corporation, AMD, and Broadcom Inc. but also on the significant consumer electronics chip orders coming annually from Apple Inc. In the domain of high-performance enterprise-level SSDs (belonging to the NAND terminal applications), the demand for SSD controllers targeting high-performance NVMe (especially PCIe Gen5/Gen6) SSDs is highly dependent on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's high-end production capacity. This means that Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's current capacity is undoubtedly far from sufficient to meet the "endless orders" brought by AI processing power and storage demands. There is an urgent need to significantly expand production capacity. The semiconductor investment chain driven by the current AI infrastructure boom, encompassing "computing power storage advanced chip manufacturing," determines that semiconductor equipment capex has a stronger stickiness than any previous cycle: the mass amount of AI training/inference computing power demand not only drives the demand for advanced logic chips but also significantly boosts the demand intensity for high-end storage chips (especially HBM/enterprise-level SSDs). With the increasing complexity of chip manufacturing processes, the "front-end advanced process steps/number of steps" per wafer increase, making it easier for equipment demand to reflect continued demand and order visibility improvements. Apart from Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR and Micron, which have already announced significant production capacity expansion plans, the Citigroup analyst team predicts that with the continuous surge in demand for AI chips and storage chips, the three largest global chip manufacturers, SK Hynix, Samsung Electronics, and Intel Corporation, are expected to significantly raise their semiconductor capital expenditure (capex) guidance for 2026 and beyond in their upcoming earnings disclosures. It is further anticipated that the global wafer fab equipment (WFE) expenditure in 2026 in the semiconductor sector could more likely approach its "most optimistic forecast outlook." The Citigroup analyst team emphasizes that Micron Technology, Inc., one of the primary competitors of Samsung Electronics and SK Hynix in the storage chip market, announced during its earnings call in December 2025 a significant increase in capital expenditure for the 2026 fiscal year (ending in August 2026), raising it from the previous $18 billion to $20 billion, implying a substantial year-on-year growth of 45%, with nearly a doubling in capital expenditure for chip manufacturing facility construction. Micron also indicated that capital expenditure would continue to increase in the 2027 fiscal year. As a direct competitor of Samsung Electronics and SK Hynix in the storage chip market, Micron's significant production expansion measures may prompt these two Korean storage chip giants to undertake corresponding capital expenditure expansion actions to maintain their market position. The Citigroup semiconductor investment strategy focuses on the "value transmission chain" from the business cycle expansion of the major chip manufacturers' capex to the growth in the total market size of WFE, and then to the expansion of orders/revenue/profits for semiconductor equipment leaders. They are betting on the continued upturn of the semiconductor equipment sector in 2026. "We recently attended the SEMI Industry Strategy Seminar in San Francisco," KeyBanc analysts wrote in a report to clients. "Our first takeaways are that there is currently a consensus in the market that semiconductor sales will reach $1 trillion this year or no later than next year. Looking back at the same period conference last year, the most optimistic estimate was for 2028, while the consensus outlook was based on expectations for 2029-2030. This shift is understandable driven by the almost bottomless AI GPU/AI ASIC demand from data centers such as Stargate, the penetration rate expansion of 2nm and below advanced process nodes, and the doubling of storage product prices. These dynamics seem to have been adequately reflected in stock prices, but when the narrative shifts to the super cycle of semiconductor equipment, you must be involved. It is certain that we have heard some necessary caution, but fundamentally no one believes that this boom will end soon." Unlike Citigroup's optimism on the three major chip manufacturing giants, KeyBanc focuses on three semiconductor equipment manufacturers In the US semiconductor equipment sector on Friday, Applied Materials (AMAT.US), AEI Industries (AEIS.US), and MKS (MKSI.US) became the market focus, primarily due to KeyBanc Capital Markets significantly raising the 12-month target stock prices for these three companies in their latest research report. For AEI Industries, KeyBanc reiterated its "overweight" bullish rating and raised the target price from $240 to $280, indicating that the substantial increase in the stock price over the past nine months seems likely to continue. "While the stock price has seen a significant increase since April, we believe that most of the performance has been driven by AEI Industries' exposure in the data center space. We continue to see various ways in which AEI Industries can succeed in the coming years," KeyBanc analysts wrote. "In the semiconductor field, we have not yet seen the introduction of new products that would have a substantial impact, which should consolidate its exclusive position in semiconductor etching and may lead to market share growth in the dielectric materials area. Therefore, we have significantly raised our revenue expectations for 2027 and 2028 in each submarket to 11% and 10%, respectively. The industrial and medical end markets have been under pressure for the past few years, and if there is a revival, it will not only increase revenue but also improve the product portfolio." "Additionally, we remind investors that AEI Industries is still actively seeking I&M (industrial and medical) acquisitions, and we believe that its high-end targets could bring in $500 million in sales and $1.25 in earnings per share, with the combined synergy effects further enhancing. Furthermore, we anticipate that AEI Industries' operational strategy will gradually improve its profit margins over the next few years, and we expect its long-term gross margin target to rise from the current 30% to over 43%." AEI primarily focuses on providing semiconductor manufacturing equipment for wafer and packaging plants, a robust demand for RF/dielectric processing semiconductor manufacturing equipment, which has been driven by the expansion of data centers. The significant expansion of data centers not only increases the demand for AI processing clusters and storage devices but also covers high-frequency networks and RF components. KeyBanc analysts also maintain an "overweight" rating for Applied Materials, the semiconductor equipment giant known as the "semiconductor equipment super factory," and significantly raised the target price from $285 to $380. The company's stock price and valuation are lagging behind its peers, as compared to KLA Corporation (KLAC.US) and Lam Research Corporation (LRCX.US). "We believe that Applied Materials, Inc.'s relatively moderate expansion is due to its high exposure to advanced process nodes facing customers in China and other regions," analysts wrote. "We understand this underperformance, but note that Applied Materials is the most diversified semiconductor equipment supplier, expected to benefit from the increasing demands for advanced packaging, deposition, and etching processes as chip architectures move toward vertical integration. It is also the most exposed semiconductor equipment company in the traditional DRAM sector, which is undoubtedly the scarcest storage product in relation to AI. This, we believe, will eventually a substantial capacity expansion. We also expect Applied Materials' 'global application service division' to achieve double-digit revenue growth in the 2027-2028 fiscal years, primarily because customers will be running Applied Materials equipment at high capacity utilization levels. We believe that Applied Materials will be favored by new funds for its relatively lower valuation premium and its core position in semiconductor manufacturing." Applied Materials' presence in chip fabs is ubiquitous. Unlike ASML Holding NV ADR's focus on lithography, Applied Materials offers high-end equipment that plays a crucial role in almost every step of chip manufacturing, including atomic layer deposition (ALD), chemical vapor deposition (CVD), physical vapor deposition (PVD), rapid thermal processing (RTP), chemical mechanical polishing (CMP), wafer etching, ion implantation, and other vital steps in chip manufacturing. Applied Materials has a significant presence in Hybrid Bonding of wafers, Silicon Through-silicon Via (TSV) chiplet advanced packaging steps, and its high-precision manufacturing equipment and customized solutions are vital for Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's 2.5D/3D level advanced packaging steps. Applied Materials, in its latest technical interpretation, pointed out that the HBM manufacturing process involves about 19 additional material engineering steps compared to traditional DRAM, and claims that its most advanced semiconductor equipment covers about 75% of these steps. It also released a key bonding system for advanced packaging/storage chips that contain HBM and advanced packaging manufacturing equipment, making the company's long-term growth vectors in HBM and advanced packaging manufacturing equipment, especially for GAA (Gate-All-Around)/Backplane Power Delivery (BPD), which are core drivers of its next strong growth phase. Lam Research Corporation's strengths are focused on high-depth-to-width ratio (HAR) etching/deposition capabilities and related processes for 3D NAND and advanced DRAM structures and interconnects, all highly dependent on Lam's unique HAR technology. The KeyBanc analyst team also significantly raised the target price for MKS to $250, up from the previous $180, and maintained an "overweight" rating. "Given its strong free cash flow position, we are not particularly concerned about MKS' leverage, and we like its broad exposure to subsystems and believe it should benefit from the continuing construction of leading manufacturing technology over the coming years," KeyBanc analysts stated. "Additionally, MKS's power products dominate most NAND etching tools, implying that even without adding new greenfield production capacity in the short term, it should continue to benefit from ongoing expenditures on equipment upgrades driven by the NAND products' manufacturing processes. In advanced packaging, we are bullish on MKS' portfolio of 'drill-fill' products for PCB and packaging substrates, advances in its technology are bringing some of the most impactful benefits to power and performance of advanced chips, while this market segment is almost without any existing additional capacity to meet demand. We believe these factors will collectively drive accelerated revenue and earnings growth, which will be driven by the cyclical recovery of semiconductors and the long-term growth brought about by the expansion of advanced packaging capacity. Due to these factors, as well as its relatively lower valuation premium compared to peers, MKSI remains one of our preferred ways to play the upturn in the semiconductor equipment cycle." MKS's semiconductor manufacturing equipment is widely used in etching, thin-film deposition, and advanced packaging processes, particularly the company's dominant subsystems and power tools in most NAND high-performance enterprise-level storage and advanced packaging markets, where it has a long-term solid market share and a steady upward trend in orders. As the demand for new production lines in storage expands, its technology also supports the capacity growth in the logic and packaging equipment markets in the long run.