Veeco Instruments
One characteristic of Veeco to be aware of is that its customers' spending patterns -- except, perhaps, those of the research customers -- are cyclical, so one part of the business can do well while another part is in the doldrums. For example, in 2005 the data storage segment was strong, but investors didn't really benefit because the LED/wireless segment was very weak. Nevertheless, I think there's enough upside potential to warrant holding Veeco for the balance of the decade. To understand why, we need to talk about Veeco's customers and products.
Data storage
Veeco makes equipment used in the manufacture of a hard-drive component called the thin film magnetic head (TFMH), which reads data from and writes it to (in digital form -- 1s and 0s) the disk's surface. This year, many hard-drive makers are transitioning their leading-edge products to perpendicular recording, a process that raises the complexity of manufacturing and should benefit equipment providers like Veeco.
Overall revenue growth in the hard-drive market is forecasted to grow between 9% and 10% range through 2008, but the numbers of hard drives sold should grow at a rate much stronger than that. Companies like Seagate
LED/wireless
LED and wireless are grouped together because similar components are used to build both LEDs and equipment for wireless networking. We'll concentrate on the LED market.
It used to be that you could buy LEDs of any color -- as long as you wanted red. These LEDs weren't bright enough for illumination and were mostly used as indicator lights on electronic equipment like stereos. But modern LEDs are available in red, green, blue, and white and are much brighter than LEDs from years past.
It isn't too surprising, then, that the range of applications is greatly expanding. LEDs are now used for backlighting in devices such as cell phones, PDAs, and LCD TVs. They're used in outdoor signage applications, such as traffic signals and storefront lighting. And they're making their way into vehicle headlamps, dashboards, and heads-up displays.
One big growth driver down the road is the use of LEDs to replace incandescent and fluorescent lighting in general illumination. LEDs need less energy to generate an equivalent amount of light from an incandescent source, and their color can be optimized to be much more pleasing than fluorescent lights. You may even have an LED flashlight at home.
Despite the expanded applications, however, LEDs have limitations. They can be lessened with improvements in manufacturing, but that, of course, will require more capital spending. One specific problem with LEDs is that, like snowflakes, no two are quite alike. Two LEDs that are supposed to be identical can have noticeable variations in both brightness and color because of small variations in their physical characteristics -- differences that get introduced during the manufacturing process. This may not be a problem for some applications, but if you want to make a nice, uniform display for a TV, the color variations have to be kept very small.
Another factor that should drive capital expansion among LED manufacturers is cheap Asian competition. The LED market is currently dominated by Cree
Semiconductor segment
Semiconductor manufacturers are always striving to reduce the size and increase the power of their chips. This year, many manufacturers are beginning to make chips with 65- or 70-nanometer feature sizes. These companies face many challenges as they try to decrease feature sizes -- one is that starting yields (the percentage of chips produced that actually work) are often very low. To increase those yields, the manufacturers have to understand the types of defects introduced during the manufacturing process and find a way to eliminate them, and doing so requires accurate measurements of critical parameters while the chips are being made. Veeco sells metrology products that perform many of these measurements.
Market researcher Gartner recently raised its forecast for 2006 semiconductor capital spending and is now projecting a 14.6% increase over 2005 levels. Makers of DRAM and NAND flash memory are driving a lot of the increase. What's more, semiconductor research outfit VLSI believes that the proportion of total semiconductor capital equipment spending devoted to metrology will increase over the rest of this decade. Veeco again stands to benefit, as should companies such as KLA-Tencor
Research
Veeco sells equipment to university and industrial research labs, including those involved in nanotechnology research. Compared with the other three types of customer, which all are all cyclical, this is a relatively stable business for Veeco. If commercial applications of nanotechnology ever take off, this part of the business could grow strongly.
Veeco's products
What allows Veeco to sell to customers in each of these applications is that many of the processing steps are similar whether manufacturing TFMHs, LEDs, or semiconductors. It is able to adapt its equipment for each of these applications since the underlying technology is very similar.
All of Veeco's instruments can be grouped into either process equipment products or metrology products. The process equipment products include tools used for depositing the thin films of material that are required to construct a working semiconductor chip, LED, or TFMH. Veeco's products employ a variety of well-known techniques to get the job done, though none of them involves anything as simple as merely "drawing" the film in the exact, and complicated, pattern that's often needed to create a functional device. Instead, manufacturers use photolithography, and one step in that process is etching, or selective removal, of portions of films after deposition. Besides its deposition products, Veeco makes a line of products that perform this etching step.
Metrology products perform measurements of film thicknesses and other critical considerations. One of Veeco's primary metrology products is its line of atomic force microscopes. These AFMs have a sharp tip mounted on a cantilevered arm, which is placed very close to the surface under measurement so that it can interact with the surface without actually touching it. As the tip moves across the surface, the interaction causes a deflection of the arm in response to variations in the surface topography. In this way, the AFM essentially provides a contour map of the surface with a resolution on the scale of individual molecules.
Foolish bottom line
Despite the competition from companies such as FEI
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Fool contributor Dan Bloom owns shares of Veeco and Seagate. He really wants a 1 TB hard drive to use in a home media server. Seagate's largest-capacity drive is currently 500 GB, but Dan hopes that Veeco can help Seagate get there in a couple of years. The Motley Fool's disclosure policy never crashes.
