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When will the market for semiconductor manufacturing equipment reach $100 billion a year? Inquiring minds want to know.

It has become a key question in the context of a crippling production shortage that has spanned the globe. The shortage has national governments planning to open their wallets, and it is already spurring record capital spending by large chip makers such as Intel and Taiwan Semiconductor Manufacturing, or TSMC. It also has investors seeing a lot of dollar signs; the PHLX Semiconductor Index is up 17% this year, handily beating out other tech subsectors thanks to strong gains by equipment makers such as Applied Materials, Lam Research and KLA.

Applied, for its part, is playing it safe. The company issued a new long-term forecast during a virtual analyst meeting on Tuesday forecasting a “base case" of $85 billion in total spending on wafer fabrication equipment by 2024. That fueled its projection for about $26.7 billion in revenue by that year, which was still about 11% ahead of the consensus 2024 forecast by the few analysts willing to project that far in what has been a notoriously cyclical sector. But the stock wasn’t priced for caution; Applied’s share price slipped more than 2% by the closing bell after having run up 66% for the year to date.

Applied is the largest semiconductor-equipment company by annual revenue, capturing about 20 cents on every dollar spent on equipment for chip foundries, according to Stacy Rasgon of Bernstein. As such, the company is in a prime position to capitalize on the industry’s growth prospects, even without gaining market share. Applied even says business will be less cyclical than in the past, with Chief Financial Officer Dan Durn promising Tuesday “higher highs and higher lows" for the company’s long-term revenue trend.

But investors could use a dose of caution on the sector overall. Government subsidies are still far from certain, and they could end up generating unintended consequences. Chris Caso of Raymond James warned clients in a note Tuesday that government involvement in chip production “could potentially lead to structural oversupply over time, which could depress industry profitability despite subsidies." And tensions with China already have resulted in export controls affecting chip gear that might not abate soon. Paul Gallant of Cowen’s Washington Research Group predicted Tuesday that new policies coming from the Biden administration “would include a more explicit protectionist element" around chips and production tools.

Still, the outlook for Applied and its peers looks strong. VLSI Research projects wafer-fab equipment spending to jump 22% to $77.6 billion this year, after a 20% gain last year. The market-research firm also projects spending will cross the $100 billion mark by 2026. Applied’s Mr. Durn called that number a “high case" for the company’s 2024 outlook. Investors bidding chip-equipment stocks up now will need to be patient either way.

This story has been published from a wire agency feed without modifications to the text.

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