As the artificial intelligence (AI) sector continues to thrive, now entering its fourth year of market dominance, a straightforward strategy has emerged among retail traders, professional investors, and Wall Street analysts: identify critical bottlenecks in the construction of large data centers that underpin AI technology, and invest heavily in those areas.
With a shortage of essential components like memory chips being recognized as a significant hurdle for AI development, investors are now focusing on high-end equipment needed by chip manufacturers to produce these chips at an accelerated pace.
This category of equipment, known as wafer fabrication equipment (WFE) or semiconductor capital equipment (semicap), is produced by companies such as Applied Materials, ASML, Lam Research, Tokyo Electron, and KLA Corp. These firms manufacture specialized tools that transform polished silicon wafers into finished computer chips, and they have recently become favored choices among investors and analysts alike.
“Never underestimate the ability of portfolio managers to disregard valuation and propel stocks that are performing, driven by the fear of underwhelming results,” an analyst remarked.
This strategic focus is underscored by a history of volatile boom-and-bust cycles, which has made major chip producers—such as TSMC, Samsung Electronics, and Intel—cautious about expanding production capacities lately. However, with chip demand on the rise, these manufacturers need to quickly enhance their clean-room facilities and equip them with the necessary tools to significantly increase chip production moving forward.
“The conditions appear favorable for a prolonged upcycle,” stated Stacy Rasgon, an analyst at Bernstein Research, in an interview with Sherwood News. “There’s a critical shortage of clean-room space.”
Other Wall Street experts seem to concur:
“We expect an upward trend in wafer fab spending over the next two years,” RBC Capital noted earlier this month.
“We anticipate that AI spending patterns will drive WFE expenditures,” Goldman Sachs commented in December.
“While our current estimate for 2026 WFE spending is a 10% yearly increase, we foresee potential upward adjustments in the 2026E semicap equipment spend,” Mizuho reported in December.
“The semi-cap market is expanding at a pace much quicker than we anticipated just a few months ago,” Barclays stated on January 15.
This sentiment aligns with what major chip manufacturers have disclosed in their recent quarterly earnings reports. Prominent among them is Taiwan Semiconductor, which recently announced plans to significantly increase capital investments to bolster production—far beyond Wall Street’s expectations.
Just last week, Intel’s stock price plummeted after forecasting lower-than-expected figures for the upcoming quarter, primarily due to its inability to secure enough chip supply for customers. Executives emphasized their commitment to ramping up investments in chip-making tools.
“We are significantly increasing tool investments in 2026 compared to 2025 to tackle this supply deficit,” said Intel CFO David Zinser during analysts’ discussions.
Additionally, Korean chip powerhouse SK Hynix published record profits and indicated a major increase in equipment spending for this year. Meanwhile, ASML, a Dutch manufacturer of chip-making machines, reported record orders and raised its sales forecast for 2026.
This surge in investments has made the semicap market a widely recognized opportunity, raising questions about whether current stock prices have overheated. Since late August, for instance, Lam Research’s shares—a company specializing in tools that process silicon wafers to create chips—have soared nearly 140%. ASML, known for its advanced extreme ultraviolet lithography machines, has risen over 100% in the same timeframe. Tokyo Electron’s stocks have climbed more than 50%, while both Applied Materials and KLA Corp boast increases approaching 80%.
These impressive gains have led to high valuations as gauged by forward price-to-earnings ratios, indicating that those entering the market now are not doing so during a dip.
“The semiconductor equipment stocks have factored in some portion of the next cycle within a matter of months,” stated Jay Deahna, who oversees AI and tech hardware coverage at BWG Global, a boutique research firm linking institutional investors with industry specialists. “One could argue that current valuations in semiconductor equipment stocks are relatively high following the recent uptick.”
Nonetheless, the sector may still have additional growth potential. If past surges in share prices related to other AI-related bottlenecks—such as AI energy companies or memory chips—are indicative, the upward trajectory could be substantial.
Over the past two years, stocks linked to the AI energy sector, including GE Vernova and Vistra, have skyrocketed by 400% and 300%, respectively. Memory chip stock Micron has surged over 350% in the last year, and Sandisk has made a staggering 1,000% jump in just the past six months.
Deahna notes that there remains uncertainty regarding the extent of growth and profit potential for semicap companies should the current AI construction boom persist, which might render historical valuation metrics less reliable for traders and investors.
“Is this going to be the most significant cycle we’ve ever seen? It remains to be seen,” he said, suggesting there may be further upside for semicap companies as institutional investors scramble to avoid missing out.
“Never underestimate the ability of portfolio managers to disregard valuation and propel stocks that are performing due to the fear of falling behind,” he stated.
As the AI infrastructure expansion continues—with projections of over $7 trillion earmarked for investment by 2030, according to McKinsey—capital will continue to flow throughout various levels of the AI supply chain. The prevailing sentiment among savvy investors is that a significant investment wave is now aimed toward chip manufacturing equipment.
“Indeed, the valuations are reaching unprecedented levels. However, I still believe you should consider long positions in semicap,” concluded Bernstein’s Rasgon. “How I will feel about it in six months is uncertain. But at present, I think maintaining a long position in semicap is advisable.”
