There are countless ways to segment the integrated circuit market. In this article I divide the IC market into two main segments - Memory and Logic/Foundry.

Memory chips are further segmented as DRAM and NAND. In the Logic/Foundry segment, it's a bit more complicated. A clear definition is given by Intel Corporation ( INTC) CEO Pat Gelsinger, who commented: Rf Power Amplifier Ic

"Intel is the sole American company both designing and manufacturing logic semiconductors at the leading edge of technology. When we launched Intel Foundry Services earlier this year, we were excited to have the opportunity to make our capabilities available to a wider range of partners."

Thus, it can be inferred that logic chips are made by companies like Intel that have their own fabs, whereas if these logic chips are designed by a fabless company like Advanced Micro Devices (AMD) or NVIDIA ( NVDA) in a foundry like Taiwan Semiconductor Manufacturing Company Limited ( TSM), they can be called Foundry chips.

The reason I say this is that equipment companies that sell their products uses these segments as part of their financial metrics. DRAM and NAND are generally segmented, but logic and foundry are sometimes separated, sometimes combined.

The memory segment has fared badly in 2H 2022. In a December 15, 2022 Seeking Alpha article entitled “Micron: Excessive Capex Spend Responsible For Plummeting Memory Market,” I presented an analysis detailing the plunging sales of memory (DRAM and NAND) ICs during 2022, capex and WFE (wafer front end) semiconductor equipment cuts, and the reason behind the malaise with memory.

To better understand the memory IC industry, Chart 1 shows DRAM revenue between Q1 2016 and F1Q 2023 (ending November 2023). It shows a peak in revenue in 2H 2018 and another following covid lockdowns. In both cycles, revenue plummeted following the peak. The peaks occurred in Q3 2018 and Q4 2021.

Chart 2 shows a similar peak for NAND revenue. The peaks occurred in Q3 2018 and Q2 2022. As with DRAM, the peaks occurred nearly simultaneously among the three memory companies Micron (MU), Samsung Electronics (OTCPK:SSNLF), and SK hynix.

In Chart 2, I show WFE equipment revenues paid by the memory companies for equipment purchases. Also, data are on a yearly basis. DRAM and NAND are combined as some equipment companies don’t separate the two. There are two important takeaways:

There are two peaks in WFE, as with DRAM and NAND revenues. The peaks occur in 2018 and 2021 for Applied Materials (AMAT) and 2022 estimated for Lam Research (LRCX), ASML (ASML), and KLA Corporation (KLAC). Final results will be known in each company’s earnings call in January, 2023.

Note the DRAM cycle (Chart 1) lasted three years and the NAND cycle lasted four years (Chart 2). Thus, the three and four-year cycle for WFE equipment in Chart 3 is consistent with peaks in memory IC revenues.

The correlation in peaks in memory revenues and equipment is not coincidental, but typical of a cycle. Companies buy equipment to increase chip capacity (capacity purchases) or to move to a smaller node (technology purchases).

For capacity purchases, chip output increases to a point where supply outpaces demand, and prices and revenue drop. Companies attempt to judiciously monitor WFE expenditures but when they make more chips than then need. Once demand catches up with supply, a new cycle begins.

In 2022, both AMAT and LRCX will have generated the largest revenues from memory, as shown in Table 1. Applied’s revenues from memory companies should reach $6.3 billion, slightly less than Lam’s $6.9 billion but well ahead of ASML’s $4.6 billion and KLA’s $2.4 billion.

Importantly, AMAT and LRCX will be the most impacted equipment companies on the basis of revenue.

Even more important is the percentage of memory revenue to total revenues. Here we see that Lam’s exposure to memory represented 55% of total revenues, significantly greater than peers, which were generally similar to each other.

Chart 4 shows Memory (NAND and DRAM) revenues between July 2019 and September 2022. Memory revenues also began decreasing in June 2022. Revenues decreased 34.7% between the peak in May 2022 and October 2022. YTD memory revenues decreased 7.7%.

Chart 5 shows IC revenues between for the same period, and excludes memory. The drop off from the peak in May 2022 until October 2022 was 2.0%. YTD, ICs excluding memory increased 15.8%. This compares to memory in Chart 4 above where Revenues decreased 34.7% between the peak in May 2022 and October 2022. YTD memory revenues decreased 7.7%.

Logic revenues are shown in Chart 6. The drop off from the peak in May 2022 until October 2022 was 4.7%. YTD, Logic increased 18.9%.

WFE revenues generated by semiconductor equipment companies for shipments to logic/foundry customers is shown in Chart 7 on a Yearly basis between 2012 and 2022. Revenues increased 17.8% YoY in 2020, 42.2% in 2021, and 17.0% in 2022.

In 2021 WFE equipment revenues for Logic/Foundry increased 42.2%. Chart 8 shows Logic/Foundry revenues by company. According to The Information Network’s report entitled “Metrology, Inspection, and Process Control in VLSI Manufacturing. AMAT exhibited strong growth in 2022, particularly in F4Q 2022, when it pulled-in revenues of $1.7 billion coming from TSMC, up from $1.3 the prior quarter.

While it may appear that Applied Materials with its deposition and etch equipment, outperformed KLA with its metrology/inspection business, that is not the case. Table 2 shows that KLAC outperformed AMAT in two of the three years, and is expected to do so in 2023 even though both will exhibit negative growth.

In Chart 8, I forecast that ASML, which has been stymied by supply chain problems in 2021 and 2022, will exhibit positive growth in 2023 because of production limitations, ASML has a backlog of 100 EUV systems with an ASP of $200 million. Unlike memory IC companies, logic/foundry semiconductor companies are not likely to cancel orders despite the downturn and oversupply of chips in 2023 as leading foundry companies migrate to smaller technology nodes.

Nevertheless, as shown above in Chart 8, the other WFE equipment companies will not be as fortunate as ASML, dropping low double digit percentages in 2023.

I estimate Memory 2023 revenues for AMAT, LRCX, and KLAC will drop close to 50% YoY over 2022. KLAC is showing strong revenue growth in 2022 on continued penetration of EUV into memory, which demands metrology/inspection equipment for smaller nodes.

In my December 15, 2022 Seeking Alpha article about Micron, I presented an analysis detailing the plunging sales of memory (DRAM and NAND) ICs during 2022, capex and WFE (wafer front end) semiconductor equipment cuts, and the reason behind the malaise with memory.

Table 3 shows Memory capex spend as a percentage of revenues for the three companies for 2020-2022. Micron cut capex in 2021 only to increase it in 2022. Samsung’s increase in 2021-2022 was because the EUV tech migration increased the ratio of capex to revenue to 44.8%.

Also shown in Table 3 are capex spend plans for TSMC, Intel, and Samsung between 2020 and 2023. Samsung's capex is for foundry only and does not include DRAM or NAND capex.

In 2021, TSMC was the biggest spender, with capex at $17.1 billion, an increase of 75.4% from 2020, growing 19.9% in 2022. Samsung capex increased 49.3% in 2020 to $9.4 billion. In 2022, Intel is forecast to increase capex 48.2%.

Nevertheless, between 2020 and 2023, TSMC's capex spend is higher each year than competitors Intel and Samsung. This increased spend will result in increased fab capacity and increased chip output.

The Chips Act will have limited near term benefits. The $53 billion in the Chips Act, intended to increase semiconductor production in the U.S., is forecast to increase semiconductor capacity just 1% between 2021 and 2025. This is detailed in my October 31, 2022 Seeking Alpha article entitled “$53 Billion Of Handouts For Chips Act And U.S. Forecast To Gain Just 1% Share By 2025!”

These are logic/foundry fabs, and based on my thesis from mid-2021 that the excessive WFE spend in 2021 and 2022 will result in an oversupply of chips in 2023 and a drop in WFE spend. It can be read in my article entitled "Applied Materials: Tracking A Likely Semiconductor Equipment Meltdown In 2023."

Semiconductor companies may build the fab shell, reaping handouts, but will closely monitor the supply/demand dynamics before installing equipment and moving into production at an inopportune time.

Chart 9 shows share price for the past 1-year period. While all stocks are down, KLAC dropped 12%, beating out peers. ASML has dropped 27%, as the company continues to have supply chain problems. The worst performance is from AMAT and LRCX with nearly identical results.

AMAT and LRCX will be the most impacted equipment companies on the basis of Memory revenue. Lam's high exposure of 55% of revenues makes the company the most susceptible to plummeting demand for memory ICs.

The logic/foundry IC sector through 2022 has not been impacted by capex and WFE overspend as has the memory sector. Nevertheless, the overspend in equipment purchases in 2020 and 2021 will result in negative growth for AMAT, LRCX, and KLAC.

ASML will benefit in 2023 from the continued tech migration to smaller nodes, as its DUV and EUV lithography equipment are required for sub 7nm nodes. It’s DUV immersion lithography equipment has only one competitor, Japan’s Nikon (OTCPK:NINOY), and its EUV systems have no competitors. The huge backlog of equipment will mitigate any revenue loss that will impact its competitors analyzed in this article.

Another strong company is KLAC. While the company will be impacted in 2023 with a pause in WFE equipment demand by semiconductor companies, the company has demonstrated its superiority among peers in stock performance.

This free article presents my analysis of this semiconductor equipment sector. A more detailed analysis is available on my Marketplace newsletter site Semiconductor Deep Dive. You can learn more about it here and start a risk free 2 week trial now.

This article was written by

Dr. Robert N. Castellano, is president of The Information Network www.theinformationnet.com. Most of the data, as well as tables and charts I use in my articles, come from my market research reports. If you need additional information about any article, please go to my website.

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I received a Ph.D. degree in chemistry from Oxford University (England) under Dr. John Goodenough, inventor of the lithium ion battery and 2019 Nobel Prize winner in Chemistry. I've had ten years experience in the field of wafer fabrication at AT&T Bell Laboratories and Stanford University.

I have been Editor-in-Chief of the peer-reviewed Journal of Active and Passive Electronic Devices since 2000. I authored the book "Technology Trends in VLSI Manufacturing" (Gordon and Breach), "Solar Panel Processing" (Old City Publishing), "Alternative Energy Technology" (Old City Publishing). Also in the solar area, I am CEO of SolarPA, which uses a proprietary nanomaterial to coat solar cells, increasing the efficiency by up to 10%. I recently published a fictional novel Blessed, available on Amazon and other sites.

Active Filter Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.