Recent heightened volatility in the memory chip sector has sparked concerns about potential spillover pressure on the semiconductor equipment sector. However, Bernstein's latest research suggests historical patterns do not support this logic. Over the past decade, the correlation between wafer fabrication equipment (WFE) stocks and the memory sector has been significantly lower than commonly perceived, allowing equipment stocks to potentially maintain relatively independent performance even during memory sector downturns.
A report from Bernstein dated July 13th indicates that since 2012, the correlation between WFE and the memory sector has consistently been at a moderate level, while the correlation between WFE and the Philadelphia Semiconductor Index (SOX) has remained high. Throughout multiple industry cycles, equipment stocks have historically achieved significant outperformance even during periods of memory sector correction.
Based on this analysis, Bernstein maintains a positive outlook on the semiconductor equipment sector, viewing the current adjustment in the memory sector more as cyclical volatility within the industry rather than a systemic risk capable of altering the equipment sector's growth trajectory.
Historical Data Shows They Are Not Inseparable
Bernstein points out that the market often overestimates the linkage between the memory and equipment sectors. Data shows that from 2012 to 2018, the stock price correlation coefficient between the memory sector and WFE was only about 0.4. Although it increased to around 0.6 after 2019, it remains moderate. In contrast, the correlation coefficient between WFE and SOX has long been maintained between 0.8 and 0.9, indicating that the equipment sector follows the broader semiconductor industry cycle more closely than the specific memory cycle.
The report also found that the level of correlation does not effectively predict their future relative returns. Whether during periods of high or low correlation, equipment stocks have significantly outperformed the memory sector, and there have also been times when their performance was similar. The true determinant of relative performance is the fundamental strength of each specific segment, not short-term stock price co-movement.
Equipment Stocks Have Outperformed Memory in Multiple Cycles
Reviewing seven semiconductor cycles since 2012, the report found that the equipment sector has repeatedly delivered positive returns during memory industry downturns. For instance, during the industry adjustment from 2015 to 2016, the memory sector recorded negative returns while the equipment sector achieved double-digit gains. During the chip market downturn from late 2021 to 2022, while memory sector losses widened, the equipment sector still maintained positive returns. Even during the pandemic period when their correlation was higher, the cumulative gains of the equipment sector were still significantly ahead of the memory sector.
In contrast, the current AI investment cycle presents a different picture. Driven by sustained tightness in HBM and traditional DRAM supply, the memory sector has significantly outperformed the equipment sector over the past year, with the gap in cumulative returns reaching a record high. Bernstein believes this suggests the current valuation premium of the memory sector relative to the equipment sector is at a historically elevated level.
Mean Reversion Could Favor Equipment Sector
The report notes that before this rally began, the memory sector had long underperformed the equipment sector, only catching up to the long-term cumulative gains early this year before rapidly widening the gap again. With the memory sector's cumulative gains far exceeding historical averages, a future return to a normal industry pace could allow the equipment sector to regain a relative performance advantage.
Bernstein emphasizes that a gradual normalization of memory prices does not necessarily mean equipment demand will deteriorate simultaneously. The key question is whether the current memory sector adjustment is merely a cyclical correction within the industry or could evolve into a systemic risk that weakens fab capital expenditure. The firm leans towards the former view, believing that AI infrastructure build-out, advanced logic process nodes, advanced packaging, and ongoing technological upgrades will continue to support global wafer fab equipment demand.
Fundamentals Remain Supportive, Earnings Estimates Have Upside
From an industry fundamental perspective, Bernstein believes the global wafer fab equipment market is still poised for growth in the coming years, with room for further upward revisions to earnings forecasts. On one hand, global memory manufacturers continue to expand investments in advanced capacity. On the other hand, multiple governments are promoting the construction of domestic semiconductor manufacturing capabilities, which is expected to continue driving related capital expenditures.
Regarding the memory industry, the report notes that while long-term agreements provide limited price support, HBM supply and demand remain tight, coupled with improving traditional memory prices, suggesting potential for further earnings revisions upward for the sector. However, compared to the memory sector, where optimistic expectations are already largely priced in, the risk-reward profile of the equipment sector currently appears more attractive.
Comments