Chip shortages lead companies to buy more equipment to boost production, says Jim Cramer

Semiconductor Capital Equipment: A Safer Play on the Memory Boom

Key Concepts:

• Semiconductor Capital Equipment: Machinery and tools used in the manufacturing of semiconductors (chips). Key players include ASML, Applied Materials, KLA, and Lam Research.
• Hyperscalers: Companies that operate and maintain large-scale data centers (e.g., Amazon, Google, Microsoft).
• Wafer Fab Equipment (WFE): Equipment used in the fabrication of semiconductor wafers.
• Capital Expenditure (CapEx): Funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, and equipment.
• Foundry: A specialized manufacturing facility for semiconductors.

I. The Risk of Chasing Memory & Data Storage Stocks

The speaker cautions against investing in companies directly involved in memory and data storage (Micron, Western Digital, Seagate, Sandisk) despite their recent significant gains (tripling in the past year, with Sandisk doubling since the start of the year, and others up 35-50%). The primary concern is the volatility of these “commodity chip makers.” Price increases, while currently high due to data center build-out, are susceptible to disruption. Potential factors that could derail these stocks include increased production from competitors like Samsung and SK Hynix, or hyperscalers reducing data center investments in response to high prices. The speaker emphasizes that even a small disruption could negatively impact these stocks, especially given their already substantial run-up. He believes investors who haven’t already invested are likely “too late.”

II. Semiconductor Capital Equipment as a Safer Alternative

A more “relatively safer” way to capitalize on the chip shortage is through investing in semiconductor capital equipment companies (ASML, Applied Materials, KLA, and Lam Research). The logic is that as chip shortages persist, companies will increase investment in manufacturing equipment to boost production. These four companies have already experienced significant gains (29-39% since the beginning of January), but haven’t risen as dramatically as the memory and data storage manufacturers, suggesting further potential for growth. The speaker believes this industry has stronger fundamentals.

III. Evidence of Increased Investment & Demand

Several recent developments support the bullish outlook for semiconductor capital equipment:

• Taiwan Semiconductor Manufacturing Company (TSMC): Reported a “blowout quarter” and announced plans for substantial capital expenditures of $52-$56 billion for the year – a 27-37% increase from the previous year, exceeding Wall Street’s expectations of less than $45 billion. TSMC management indicated that supply and demand won’t balance until 2028-2029, necessitating continued high CapEx. This investment is primarily driven by demand for AI semiconductors, which require more advanced manufacturing equipment.
• Micron’s Foundry Investment: Micron broke ground on a $100 billion semiconductor foundry in New York, requiring significant equipment purchases. They are also expanding facilities in Boise, Idaho (output by H2 2027) and Singapore (production by H2 2028), ensuring consistent orders for equipment manufacturers.
• Intel’s Manufacturing Constraints: Intel’s recent earnings report was negatively impacted not by poor results, but by its inability to meet demand due to a lack of manufacturing equipment. This highlights the crucial role of capital equipment providers.

IV. Specific Company Focus: Lam Research

Lam Research is highlighted as a particularly attractive investment. It’s a leading provider of equipment for both memory chip and CPU manufacturing. The stock rallied 137% last year, adding another 39% in January. The speaker references a note from Lynx Equity Strategists suggesting that positive earnings results are already priced into Lam’s stock, but remains bullish due to expectations of stronger performance in 2027. He states, “If management gives a qualitative view of wafer fab equipment into 2027…the stock could soar.” He would consider buying the stock if it experiences a sell-off. He notes Lam Research was a favorite pick during his show from 2005-2012, praising its strong management and innovative technology.

V. Upcoming Earnings Reports & Investor Strategy

Earnings reports for the capital equipment companies are imminent:

• ASML: Reporting overnight.
• Lam Research: Reporting after the close tomorrow.
• KLA: Reporting Thursday night.
• Applied Materials: Reporting in mid-February.

While expecting positive results, the speaker acknowledges the high expectations and uncertain market reaction. His overall strategy is to wait for potential pullbacks, viewing them as buying opportunities for long-term investment. He emphasizes a long-term perspective, aligning with the “Mad Money” philosophy. As stated by the speaker, “If you want to play the memory and data storage without chasing stocks that have tripled or quadrupled in barely more than a year, I think the semiconductor capital equipment makers will be more durable winners here.”

Technical Terms Explained:

• Semiconductor: A material with electrical conductivity between a conductor and an insulator, used in electronic devices.
• CapEx (Capital Expenditure): The funds a company uses to acquire or upgrade physical assets.
• WFE (Wafer Fab Equipment): The specialized machinery used to manufacture semiconductors on silicon wafers.

Logical Connections:

The segment builds a case for shifting investment focus from the volatile memory and data storage sector to the more stable semiconductor capital equipment sector. The argument is supported by evidence of increasing demand for chips (driven by AI and overall technological advancement), leading to increased investment in manufacturing capacity, which directly benefits the equipment manufacturers. The discussion flows from identifying a risk (chasing overvalued stocks) to proposing a solution (investing in a related, but less speculative, sector).

Data & Statistics:

• Memory/Data Storage Stock Gains (Past Year): Tripled or more.
• Sandisk YTD Gain: >100%
• Other Memory/Data Storage Stock YTD Gains: 35-50%
• Semiconductor Capital Equipment Stock Gains (YTD): 29-39%
• TSMC Planned CapEx: $52-$56 billion (27-37% increase YoY)
• Micron Foundry Investment: $100 billion
• Lam Research Stock Performance: +137% (last year) +39% (January)

Conclusion:

The speaker advocates for a strategic shift in investment approach within the semiconductor industry. While acknowledging the recent success of memory and data storage companies, he believes the semiconductor capital equipment sector offers a more sustainable and potentially lucrative opportunity. Driven by substantial investments from major players like TSMC and Micron, and fueled by the ongoing chip shortage, these equipment manufacturers are poised for continued growth. The key takeaway is to prioritize long-term value and consider buying on any potential dips in price.