Bank of America raises chip equipment spending expectations, Applied Materials and Lam Research Group are the top preferred stocks.

Application Materials (AMAT.US) and Lam Research Group (LRCX.US) remain Bank of America Corp's top picks in the semiconductor equipment sector, as the bank now believes that equipment spending will continue to increase. "After going through a quarter of earnings filled with variables, we have updated our forecast for wafer manufacturing equipment. The expansion of demand for AI wafers has prompted all major semiconductor companies to point out an unusually strong market environment (with a promising outlook extending for 12-24 months), with companies like Lam Research Group (growing over 23% year-on-year), KLA Corporation (KLAC.US) (growing close to 10% year-on-year) and Applied Materials (System Business growing 20% year-on-year) providing particularly bright performance outlooks for 2026, which will accelerate growth in 2027," analyst Vivek Arya wrote in a report to clients. Arya currently expects chip equipment spending to reach $140 billion in 2026, $171 billion in 2027, and $193 billion in 2028, compared to previous forecasts of $131 billion, $150 billion, and $155 billion respectively. He also predicts that spending levels in 2029 and 2030 will reach $186 billion and $201 billion respectively. Arya added, "We believe that the compound annual growth rate for fiscal years 2025-2028 will reach 18%, and this industry expansion may still be constrained by supply, but semiconductor sales will increase from around $780 billion in the fiscal year 2025 to nearly $1.3 trillion in fiscal year 2028 (a compound annual growth rate of 17%), reflecting a healthy growth momentum in the market. The surge in demand for AI is squeezing out production capacity for advanced logic; additional capacity is needed. With the advancement of the XPU/accelerator roadmap and the rise of AI, competition for scarce capacity in advanced logic will become exceptionally intense." After a thorough analysis, Arya expressed that the competition in the 3-nanometer process field is fierce, with NVIDIA Corporation's Rubin chip competing against AMD's MI350X and MI400X, Alphabet Inc. Class C's TPU v7, and Amazon.com, Inc.'s Trainium 3 chips. Arya explained that there is also a bottleneck in the CPU sector, as Intel Corporation and AMD have raised prices, and NVIDIA Corporation's Vera CPU has further intensified market tension. Switches have also achieved 3-nanometer-level processing, with NVIDIA Corporation's NVLink 6, and Marvell Technology, Inc. and Broadcom Inc. both increasing their output capabilities. Arya stated, "The expansion of AI chips for Rack Scale Architecture (RSA) (Vera Rubin POD uses 7 different chips), the scaling of inference/smart agents, and the diversity of design starting points are all driving wafer demand far beyond current supply levels (UTR is about 100%). Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US) (has delayed the delivery cycle of its wafer factory to 2027) and Intel Corporation/Samsung are both racing to catch up. Furthermore, while it is still early to assess Elon Musk's Terafab project now, we believe that its initial capacity of 100,000 sheets per month could bring in over $20 billion in wafer factory equipment revenue in the long run." Arya stated that as the demand for High Bandwidth Memory (HBM) and Dynamic Random Access Memory (DRAM) continues to grow due to AI, chip equipment manufacturers may also benefit from the ongoing demand for memory. Additionally, Micron Technology, Inc.'s capital expenditure increased by 25% year-on-year for acquiring wafer factories to increase capacity, further exacerbating the sense of urgency. Arya added, "While prices may tend to stabilize, long-term supply contracts (3-5 years) provide reliable visibility and allow memory suppliers to have confidence in cash flow, enabling them to continue investing. Suppliers have the ability to differentiate pricing and charge premiums for HBM and increasingly common DRAM, which is also a driving force for their investment. The upgrade to NAND flash to 300L will also maintain strong momentum in 2027."