Taiwan Semiconductor Manufacturing (TSM +1.40%), popularly known as TSMC, released fourth-quarter results on Jan. 13 and shares of the chip giant surged following the report as it became evident that the demand for chips is going to stay strong in 2022 and beyond.
One of the highlights of TSMC's report was the big bump in the company's capital spending budget for 2022. The company has outlined a capital expenditure budget of $40 billion to $44 billion for this year, which points toward a roughly 40% increase over 2021 capex of $30 billion. This expected boost isn't surprising given the global semiconductor shortage that has hamstrung several industries.
TSMC expects annual revenue growth of 15% to 20% in the coming years, which is double what it estimated earlier. To achieve that, it needs to make more chips to satisfy booming demand, and it needs to invest in equipment so that it can ramp up production. The big jump in the company's planned spending to meet that need bodes well for Applied Materials (AMAT +0.42%) and ASML Holding (ASML +2.05%), which both supply semiconductor manufacturing equipment to TSMC.
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Applied Materials
Applied Materials, according to the company, "develops, manufactures, and sells a wide range of manufacturing equipment used to fabricate semiconductor chips," and TSMC is one of its largest customers, producing 15% of Applied Materials' revenue in the fiscal year that ended on Oct. 31. This made the Taiwanese chip giant its second-largest source of revenue after Samsung, which accounted for 20% of Applied Materials' top line last fiscal year.
So it isn't difficult to see why TSMC's aggressive capital spending plan is good news for Applied Materials. After all, TSMC's massive capex bump last year gave Applied Materials a major boost. The company's fiscal 2021 revenue shot up 34% to a record $23 billion helped, by a huge jump in its semiconductor order backlog.
Applied Materials points out that its backlog consists of "orders for which written authorizations have been accepted, or shipment has occurred but revenue has not been recognized," indicating that the company is on track to clock another solid year as it fulfills those orders. TSMC's 2022 capex plans mean that Applied Materials could witness strong growth in orders once again this year.
All this helps make Applied Materials a top semiconductor stock to buy right now, especially considering its trailing earnings multiple of 24 and forward earnings multiple of 18.7, which makes it cheaper than the S&P 500, which sports an earnings multiple of 28.8. Analysts expect Applied Materials' revenue to increase 15% in fiscal 2022, along with a 20% pop in earnings per share, but it won't be surprising to see the company grow at a faster pace thanks to TSMC.
ASML Holding
One of the reasons why TSMC recorded 24% year-over-year revenue growth in the fourth quarter was because of robust demand for processors based on the 5-nanometer (nm) manufacturing process. TSMC said 5 nm chips accounted for 23% of its wafer shipments in the fourth quarter, while 7 nm chips made up 27% of wafer sales.
TSMC said that advanced processor nodes produced more than half of its total revenue during the quarter. What's more, TSMC is reportedly looking to pour money into more advanced process nodes that will further shrink chip sizes. Tom's Hardware reports that the company may spend 70% to 80% of its planned 2022 capex on fabrication plants (fabs) that could build 2 nm, 3 nm, 5 nm, and 7 nm chips.
The publication added that as TSMC had spent a lot of money on building fabs capable of making 5 nm chips last year, it is likely to put more money into fabs that can manufacture chips based on 2 nm and 3 nm processes in 2022. This would be great news for ASML as chips smaller than 7 nm can only be made through a process called extreme ultraviolet (EUV) lithography, and the Dutch giant is the only company that makes those machines.
ASML is estimated to control more than 90% of the semiconductor lithography market, while its share of the EUV lithography market is almost 100%. This puts ASML in a great position to benefit from TSMC's increased capital spending this year, and that should help the former sustain its impressive growth in 2022.
ASML expects its revenue to increase by 20% in 2022. While that is slower than the 33% growth it achieved in 2021, the company could raise its guidance as the year progresses thanks to the huge backlog it is sitting on. ASML's net bookings at the end of 2021 increased to 26.2 billion euros, which is more than double the 11.2 billion euros in net bookings it had in the year-ago period. Such massive growth in ASML's backlog isn't surprising as it reportedly gets 31% of its revenue from selling its machines to TSMC.
So ASML seems built for upside in 2022. ASML is a growth stock that investors may want to hold on to for the long run. The company expects to generate annual revenue of 24 billion euros to 30 billion euros by 2025, a big bump over its earlier expectation of 15 billion euros to 24 billion euros, indicating that the semiconductor spending boom is going to be a long-term catalyst for ASML.
