Veeco Instruments Battered As Doubts Mount

This has been a lousy year for Veeco Instruments (VECO), as this supplier of tools for the LED and semiconductor markets has seen its share price cut in half on repeated earnings disappointments, an unexpected litigation outcome, and growing worries about the company's long-term margin and growth leverage. While the acquisition of Ultratech earlier in the year achieved the company's goal of diversification, it seems to be coming at the cost of even more volatility and uncertainty in the business.

I can see some upside in the shares from here, but it's not clear to me that it is worth the hassle and the risk. Veeco is going into 2018 with a strong backlog, but the MOCVD market could be approaching a near-term peak and serious emergent competition is eroding margins. In the advanced packaging and semiconductor businesses, Ultratech's historical volatility is continuing and there are no guarantees on the timing or magnitude of LSA or packaging-driven growth.

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Veeco Instruments Battered As Doubts Mount

Investopedia: Can LEDs Brighten Investor Portfolios?

Goldman Sachs recently highlighted LED lighting as a top “disruptive” theme over the next decade. While I'm often inclined to believe that these sell-side "theme pieces" are designed more towards generating attention during stretches of slow company news, I have little doubt that the penetration rate of LEDs in the lighting market is going to increase significantly over the next decade. That is going to fuel significant demand for LED-making equipment, LED packaging, and finished lighting fixtures for companies like Aixtron (Nasdaq:AIXG), Cree (Nasdaq:CREE), Philips (NYSE:PHG), and Osram What is less clear to me is the extent to which investors can expect to see huge gains at this point – the “LED revolution” has been long in coming and while there are certainly going to be trading opportunities come and go, the idea of “buy and hold” in this sector seems optimistic at best.

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Investopedia: Aixtron Is A Volatile Way To Play LED Growth

It's a stretch to say that LEDs are everywhere, but maybe not by much. LEDs are still generally too expensive for residential, commercial or municipal lighting, but pretty much every smartphone, tablet or notebook PC owner has an LED screen on their device, and likewise for many TV owners.

Given the considerable economic advantages, LED lighting is likely a "when, not if" proposition, and that should spur demand for the critical LED-making equipment that Aixtron (Nasdaq:AIXG) sells. The key question for investors, however, is whether the stock of a very volatile equipment maker like Aixtron is really the way to play the next run in LEDs.

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Investopedia: Lam Snaps Up Novellus

Given the incredibly cyclical nature of semiconductor capital equipment spending and the growing power of a relatively small number of buyers, consolidation just makes sense. While Applied Materials (Nasdaq:AMAT) has been more active of late in buying companies, Lam Research (Nasdaq:LRCX) has stepped up in a big way with an offer for Novellus Systems (Nasdaq:NVLS).

The Deal
Lam announced that it had reached an agreement to acquire Novellus in a $3.3 billion all-stock deal. Lam will give 1.125 of its shares for each Novellus share - a deal which imputes a value of $44.42 per share for Novellus based on pre-announcement prices. That price is a 28% premium for Novellus, but only about 2.3 times trailing sales - a modest discount to historical multiples and a definite discount to the recent Applied Materials - Varian deal.

If the deal goes through as expected, Lam shareholders will own 58% of the combined company, and Lam intends to launch a $1.6 billion share repurchase to neutralize some of the impact of the deal. (For related reading, see The Merger- What To Do When Companies Converge.)


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Investopedia: Playing The Applied Materials Rollercoaster

Semiconductor equipment giant Applied Materials (Nasdaq:AMAT) is a frustrating name in many respects. Nobody disputes that AMAT is a leading name in the equipment that companies require to manufacture semiconductor, LEDs, flat panels and solar films. On the other hand, while the company's revenue and cash flow base has chopped upwards, the stock has yet to break out of a ten-year downward trend. That makes this stock a challenging trade-off between quality, valuation and sentiment. 


A Solid Start to the Fiscal Year
At least AMAT is getting this fiscal year off to a decent start. Revenue rose 45% from last year, but dropped about 7% from the prior quarter, and beat the average analyst guess. The underlying revenue mix was a bit more volatile; the company's core semiconductor business was up slightly, while the display and solar businesses fell off sequentially.

Profitability was not bad. Gross margin (on an adjusted basis) stayed sequentially consistent, as did the company's operating margin. That's not given that it is not at all uncommon for companies like Applied Materials to see a sharper falloff in profits on lower sequential revenue.


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Apply Patience To Applied Materials

Technology investors are not always the most patient lot on Wall Street, and it is certainly true that a buy-and-hold approach towards sectors like semiconductors will produce some pretty nasty year-to-year volatility. That said, patient investors might want to think about swimming against the current on Applied Materials (Nasdaq:AMAT). Investors have certainly cooled on some parts of the chip sector and Applied's iffy guidance to start the next year will not help matters, but there could be real value here for more patient buyers.

A Solid End To The Fiscal Year
While guidance will probably emerge as the dominant theme from Applied Material's report, the fiscal fourth quarter was actually pretty solid. Revenue rose almost 15% sequentially and jumped 89% from last year's level, easily beating both the average analyst guess and the highest published estimate. Sales were led once again by the Silicon Systems Group, but the sequential growth came from every other business unit but SSG.

Profitability was also substantially better than in the year-ago period. Adjusted gross margin rose six full points from the year-ago period and even more on a sequential basis. Operating profit (again, adjusted) was likewise strong - more than doubling on a sequential basis.


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