Semiconductor Equipment Spending to Reach New Heights in 2025: 1 Top Stock to Buy Now

We are excited to share our analysis on the semiconductor equipment market, which is projected to reach new heights in 2025. As the demand for advanced chips, particularly for AI and automotive applications, continues to grow, so will the need for semiconductor equipment. In this article, we will discuss the factors driving this growth, the impact of government subsidies and geopolitical dynamics, and highlight one top stock to buy before the spending surge in 2025.

Drivers of Semiconductor Equipment Spending in 2025

1. Increased demand for advanced chips: The growing demand for AI chips and the expansion of cloud/data centers are expected to drive semiconductor equipment spending in 2025. According to the 20th annual survey conducted by KPMG LLP (KPMG) and the Global Semiconductor Alliance (GSA), AI has ascended to the top position as the most important application driving semiconductor company revenue, displacing automotive. This shift in demand is reflected in the top product opportunity for industry growth over the next year, with microprocessors (including graphics processing units used for AI) ranking as the top product opportunity ahead of memory and sensors/MEMS.
2. Shift towards smaller, more efficient chips and EUV lithography: The shift in semiconductor manufacturing towards smaller, more efficient chips, and the increasing adoption of EUV lithography, is expected to significantly influence the demand for semiconductor equipment in 2025. As companies like Apple, Nvidia, and Advanced Micro Devices (AMD) adopt more advanced process nodes such as 7nm, 5nm, and 3nm for their chips, the demand for semiconductor equipment capable of handling these nodes will increase. The increasing adoption of EUV lithography machines, which are crucial for manufacturing chips at advanced process nodes, will also drive demand for these machines.
3. Market growth projections: The semiconductor equipment industry is expected to see significant growth in the coming years. Sales of semiconductor equipment are forecast to increase by 6.5% in 2024 to $113 billion, and then jump to a new record of $121 billion in 2025, followed by a much stronger jump in 2026 to $139 billion (Source: Article). This growth is driven by the increasing demand for advanced chips and the adoption of EUV lithography.

Government Subsidies and Geopolitical Dynamics

Government subsidies and geopolitical dynamics are expected to significantly impact the growth in semiconductor equipment spending. Here's how:

1. U.S. CHIPS Act: The U.S. CHIPS Act, signed into law in August 2022, provides $52 billion in subsidies for semiconductor manufacturing and research. This act aims to boost domestic semiconductor production and reduce reliance on foreign suppliers. As a result, semiconductor companies are expected to invest more in expanding their manufacturing capabilities, driving demand for semiconductor equipment. According to a report by KPMG and the Global Semiconductor Alliance, 84% of executives expect their workforce to either expand or remain the same in the next year, indicating increased investment and activity in the industry.
2. China's investment in semiconductor manufacturing: China has been actively investing in semiconductor manufacturing to reduce its dependence on foreign technology and establish dominance in the industry. In 2024, China announced its third state-backed investment fund, with 47.5 billion U.S. dollars made available to companies focused on chip manufacturing, design, equipment, and materials. This investment is expected to drive demand for semiconductor equipment, as companies expand their manufacturing capabilities. In 2023, China emerged as a major player in semiconductor equipment spending, with spending reaching 236.6 billion U.S. dollars.
3. Geopolitical dynamics: Geopolitical tensions, such as territorialism, armed conflicts, and tariffs, are altering supply chains and driving companies to diversify their manufacturing locations. In response to these concerns, increasing geographic diversity was cited as the top improvement semiconductor leaders expect to make to improve supply chain resiliency. This shift in supply chains is expected to drive additional demand for semiconductor equipment as companies establish new manufacturing facilities in different regions.

1 Top Stock to Buy Before the Spending Surge in 2025

Based on our analysis, we believe that Applied Materials (NASDAQ: AMAT) is a top stock to buy before the semiconductor equipment spending surge in 2025. Here's why:

1. Strong fundamentals: Applied Materials has a low three-year median payout ratio of 15%, meaning that the company retains the remaining 85% of its profits. This suggests that the management is reinvesting most of the profits to grow the business. Additionally, the company has been paying dividends for at least ten years or more, showing its commitment to sharing profits with shareholders. The company's earnings growth is expected to slow down, as forecasted in the current analyst estimates, but its strong fundamentals make it an attractive investment.
2. Analyst recommendations: The majority of analysts covering Applied Materials have a "buy" recommendation, with 33 analysts providing opinions. This consensus indicates that the stock is undervalued and has significant upside potential.
3. Strategies for growth: Applied Materials is investing in research and development to maintain its technological lead in semiconductor equipment while also returning capital to shareholders through buybacks and dividends. The company has reduced its share count by 33% over the last 10 years, which helps boost earnings and dividends per share. Today, the stock trades at a price-to-earnings ratio (P/E) of just below 19, and management has committed to returning 80% to 100% of its future free cash flow to shareholders through buybacks and dividends. These strategies are expected to drive long-term share price appreciation for Applied Materials.

In conclusion, the semiconductor equipment market is expected to reach new heights in 2025, driven by factors such as increased demand for advanced chips, the shift towards smaller, more efficient chips, and the increasing adoption of EUV lithography. Government subsidies and geopolitical dynamics are also expected to impact the growth in semiconductor equipment spending. Based on our analysis, we believe that Applied Materials (NASDAQ: AMAT) is a top stock to buy before the spending surge in 2025, given its strong fundamentals, analyst recommendations, and strategies for growth.