If storage performs poorly, can semiconductor equipment still hold up?

The storage chip sector has experienced increased volatility recently, raising concerns in the market about whether the semiconductor equipment sector will also come under pressure. However, Bernstein’s latest research suggests that historical data does not support this logic. Over the past decade, the correlation between semiconductor equipment (WFE) and the storage sector has been much lower than commonly assumed by the market, and equipment stocks are entirely capable of maintaining relatively independent performance during storage market adjustments.

Bernstein’s report released on July 13 indicates that since 2012, the correlation between WFE and the storage sector has long been at a moderate level, whereas the correlation between WFE and the Philadelphia Semiconductor Index (SOX) has remained high. During multiple past industry cycles, equipment stocks achieved significant excess returns during storage sector pullbacks.

Based on this assessment, Bernstein continues to maintain a positive outlook on the semiconductor equipment sector and believes that the current adjustment in the storage sector is more likely an internal cyclical fluctuation, rather than a systemic risk strong enough to change the prosperity of the equipment industry.

Historical data shows the two are not “prosper together, suffer together”

Bernstein points out that the market tends to overestimate the linkage between the storage sector and the equipment sector.

Data shows that from 2012 to 2018, the correlation coefficient between the storage sector and WFE stock prices was only about 0.4; since 2019, it has increased somewhat, but only to about 0.6. In contrast, the correlation coefficient between WFE and SOX has long stayed between 0.8 and 0.9, indicating that the equipment sector largely follows the prosperity of the overall semiconductor industry rather than just single storage cycles.

The report also found that the level of correlation does not effectively predict the relative returns of the two sectors in the future. Whether in periods of high or low correlation, equipment stocks have significantly outperformed the storage sector, and there have also been times when their performances were similar. What really determines relative performance is the fundamentals of each sub-sector, rather than short-term stock price movements.

During multiple industry cycles, equipment stocks have outperformed storage against the trend

The report reviewed seven semiconductor cycles since 2012 and found that the equipment sector achieved positive returns multiple times during downturns in the storage industry.

For example, during the industry adjustment from 2015 to 2016, the storage sector recorded negative returns, while the equipment sector saw double-digit growth. During the 2021–2022 chip market downturn, the storage sector’s losses widened, yet the equipment sector still maintained positive returns. Even during periods when the correlation between the two was relatively high, such as during the pandemic, the cumulative gains of the equipment sector clearly led those of the storage sector.

In contrast, the current AI investment cycle has produced a distinctly different scenario. Driven by persistent shortages in HBM and traditional DRAM supply, the storage sector has significantly outperformed the equipment sector over the past year, with the gap in cumulative returns reaching a historic high.

Bernstein believes this means the valuation premium of the storage sector relative to the equipment sector is now at historically high levels.

Mean reversion may give the equipment sector a relative advantage

The report points out that prior to this rally, the storage sector had long underperformed the equipment sector, only catching up with cumulative gains at the start of this year, after which the gap quickly widened.

As cumulative gains in the storage sector far exceed historical averages, if the industry returns to a normal pace in the future, the equipment sector may regain a relative advantage in returns.

Bernstein emphasizes that as storage prices gradually return to normal, it does not mean that equipment demand will worsen in tandem. The real question is whether the current adjustment in the storage sector is just a cyclical correction within the industry, or will it turn into a systemic risk that dampens wafer fab capital expenditure.

The firm prefers the former, believing that AI infrastructure development, advanced logic processes, advanced packaging, and ongoing technological upgrades will continue to support global demand for wafer fabrication equipment.

Fundamentals remain supportive, room for upward earnings revisions

From the perspective of industry fundamentals, Bernstein believes that over the next few years, the global wafer fabrication equipment market is likely to continue growing, and industry earnings forecasts could be further revised upward.

On one hand, global storage manufacturers continue to expand investments in advanced production capacity; on the other hand, many governments are also promoting local semiconductor manufacturing capabilities, and relevant capital expenditures are expected to continue.

For the storage sector, the report notes that while long-term agreements provide limited price support, HBM supply remains tight and, together with improvements in traditional storage pricing, the industry could see further upward earnings revisions. However, compared to the already optimistic expectations reflected in the storage sector, the risk-reward ratio for the equipment sector is currently more attractive.

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