Veeco Instruments (VECO): A Contrarian Play in Semiconductors Amid Index Exclusion and Trade Tensions

The recent exclusion of Veeco Instruments Inc. (NASDAQ: VECO) from the Russell 3000 Growth Index on June 27, 2025, has triggered near-term volatility, with passive funds unwinding positions and trimming exposure. Yet, beneath the noise of index-related selling lies a compelling story: Veeco's strategic position in the semiconductor capital expenditure (CapEx) boom, paired with its leadership in advanced manufacturing technologies, makes it a potential contrarian opportunity in a sector critical to global tech competition.

The Near-Term Headwind: Index Exclusion and Liquidity Pressures

Veeco's removal from the Russell 3000 Growth Index—effective June 27—has immediate consequences. Passive funds tracking the index are forced to sell their holdings, reducing liquidity and amplifying short-term price swings. Historical data shows excluded stocks often see a 20%+ drop in daily trading volumes in the following year, compounding the impact of forced selling.

However, this is a mechanical outcome of index composition rules, not a reflection of Veeco's operational health. The company's Q1 2025 results—revenue of $167.3M, down slightly from $174.5M in 2024—remain robust, and its non-GAAP net income of $0.19 per share underscores profitability. Guidance for Q2 2025, projecting revenue between $135M–$165M, aligns with cyclical demand patterns in the semiconductor industry.

The Bull Case: Semiconductor CapEx Resilience and Geopolitical Tailwinds

The broader narrative here is far more bullish. The global semiconductor industry is undergoing a $100B+ CapEx boom, driven by demand for advanced chips in AI, 5G, and electric vehicles. Even amid U.S.-China trade tensions, governments are prioritizing domestic semiconductor production to avoid supply chain vulnerabilities.

Veeco's specialty lies in atomic-level deposition systems—critical for manufacturing next-gen semiconductors, including those used in EUV lithography and power electronics. Its customer base includes industry leaders like TSMC, Intel, and Samsung, which are all ramping up CapEx to stay ahead of Moore's Law limits.

Trade tensions, while creating uncertainty, also accelerate this trend. For instance, the U.S. CHIPS Act and China's “self-reliance” push are funding domestic chip fabs, directly benefiting Veeco's equipment sales. The company's $149M cash balance and focus on high-margin advanced systems (e.g., atomic layer deposition tools) position it to capitalize on this secular shift.

Why Now? Contrarian Value in a Volatile Market

The index exclusion has created an entry point for investors willing to look past short-term noise. Veeco's trailing P/E of ~25X is reasonable compared to its growth peers, and its ~15% 5-year revenue CAGR suggests it's well-positioned to outperform in a rising CapEx environment.

Moreover, the semiconductor cycle is showing signs of recovery. Memory chip inventories have normalized, and foundries are expanding capacity for AI-driven applications. Veeco's exposure to front-end semiconductor manufacturing—the most capital-intensive part of the supply chain—means it could outperform if CapEx accelerates in 2026.

Risks to Consider

• Trade Policy Volatility: U.S.-China tensions could disrupt supply chains or limit export opportunities.
• Cyclical Semiconductor Demand: A prolonged downturn in consumer electronics or cloud computing could delay CapEx plans.
• Competition: Rivals like Lam Research and ASML might undercut margins with competing technologies.

The Bottom Line: Buy the Dip, Play the Long Game

Veeco's exclusion from the Russell 3000 Growth Index is a temporary setback in a long-term story of semiconductor innovation and geopolitical necessity. With a strong foothold in advanced manufacturing and a sector poised to grow, VECO offers a compelling risk/reward for investors with a 3–5 year horizon.

Investment Thesis:
- Buy: On dips below $25/share (as of late June 2025), with a 12-month target of $35–$40.
- Hold: For investors who can stomach short-term volatility.
- Avoid: Only if global CapEx trends collapse or trade tensions escalate beyond current levels.

In a world where semiconductors are the new battleground for tech supremacy, Veeco's niche in enabling the future of chipmaking makes it a stock worth owning—even after the index drop.