Normally, large market share would sound like a golden ticket for shareholder returns. It's not so simple when it involves the semiconductor equipment industry, and Cymer (Nasdaq:CYMI) has proven to be just as cyclical as customers like ASML (Nasdaq:ASML) and other equipment companies like Applied Materials (Nasdaq:AMAT). With the photolithography industry on the cusp of both a rebound in demand and a major new technology cycle, investors may want to revisit this story.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

The Big Dog in a Critical Step
Photolithography is an essential step in the manufacturer of semiconductors as the light source imprints the circuit pattern on the wafer. What's more, increasingly sophisticated light sources and photolithography machines have helped make Moore's Law a reality and enabled increasingly complex chips.

Cymer specializes in the guts of photolithography - the light sources. Cymer holds a large share of the market and counts all of the lithography companies such as ASML, Canon (NYSE:CAJ), Nikon (OTCBB:NINOY) as customers, as well as major semiconductor companies like Samsung and Intel (Nasdaq:INTC). While Cymer has long maintained a technology lead over its competition, virtually all of its customers dual-source light sources and there are competitive price/performance trade-offs.

SEE: A Primer On Investing In The Tech Industry

What's the ETA For EUV?
One of the hot topics in semiconductor equipment is the development and commercialization of extreme ultraviolet (EUV) light sources and lithography equipment. EUV is a big jump forward in technology and should prove to be a key part of enabling even smaller circuits in the coming years.

Unfortunately, EUV is not easy and its birth has not been painless. Companies have been working on this technology for at least a decade, and while equipment with EUV light sources has shipped, it's not considered a commercial technology yet. Some of the problem is cost - EUV costs about 10 times as much as current state-of-the-art ArFi systems - but there are still kinks to be worked out (including throughput) and timelines have been sliding.

SEE: The Semiconductor Industry

An Opening in the Armor?
Cymer has a huge share of the installed base out there, and by and large isn't all that vulnerable to its competition. After all, it is the supplier of choice for the market-leading lithography company (ASML), and these tend to be long-term installations.

That said, I do believe that technology transitions offer the rare opportunities for competitors to shift some of that share.

Gigaphoton (a wholly-owned subsidiary of Komatsu (OTCBB:KMTUY) since 2011) holds about 20% of the overall light source market, and is working on the same laser produced plasma EUV technology as Cymer. Ushio, formerly a partner with Komatsu in Gigaphoton, is taking a different course with its discharged produced plasma technology. Will either of these companies steal the march on Cymer? History says "no," but past performance has never guaranteed future results.

The Bottom Line
I like Cymer quite a lot as a company, but not so much as a stock. There's already a lot of optimism built into sell-side numbers, as several analysts are calling for over $900 million in revenue in 2014 (more than 50% above the prior peak). Certainly, a large-scale commercial roll-out of EUV could support that, but my point is rather that a lot what can go right at Cymer already seems to be in the numbers.

Assuming a multi-year cycle of strong revenue growth and improving free cash flow conversion, I could see a fair value of around $60 on Cymer shares today. That's not bad potential for existing shareholders, but I'm not sure 20% undervaluation would induce me to buy when there are cheaper growth stories in semiconductor equipment.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  2. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  3. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  4. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  5. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  6. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  7. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  8. Investing News

    What Alcoa’s (AA) Breakup Means for Investors

    Alcoa plans to split into two companies. Is this a bullish catalyst for investors?
  9. Stock Analysis

    Top 3 Stocks for the Coming Holiday Season

    If you want to buck the bear market trend by going long on consumer stocks, these three might be your best bets.
  10. Investing News

    Could a Rate Hike Send Stocks Higher?

    A rate hike would certainly alter the investment scene, but would it be for the better or worse?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!