Wall Street thinks the next bottleneck in AI is chip equipment

As the AI boom rumbles into its fourth year of dominating the market, retail traders, professional investors, and Wall Street analysts alike have largely settled on a simple strategy for catching the next wave of gains: find an emerging bottleneck in the build-out of massive data centers that power AI. Then buy lots of it.

And with low inventories of key inputs like memory chips emerging as a well-established snarl for AI, Wall Street is betting the next rush could be for the high-end machinery that chipmakers need to churn out more of these chips.

Known as WFE (wafer fabrication equipment) or semicap stocks (semiconductor capital equipment), these companies — such as Applied Materials, ASML, Lam Research, Tokyo Electron, and KLA Corp — make highly engineered tools that turn mirror-like silicon wafers into finished computer chips. They’ve emerged in recent weeks as popular picks among investors and Wall Street analysts alike. 

The reason why is clear: repeated boom-and-bust cycles made large producers of chips — like TSMC, Samsung Electronics, and Intel, which buy the lion’s share of chipmaking equipment — leery about adding production capacity in recent years. But now, with demand for chips surging, they’re going to have to quickly add additional clean-room space and fill it with tools to make a lot more chips for the foreseeable future. 

“The ingredients are probably in place for a sustained upcycle,” Bernstein Research analyst Stacy Rasgon told Sherwood News in an interview. “There’s no clean-room space.” 

Others on Wall Street seem to agree:

“We see upward bias to wafer fab spending for the next two years,” RBC Capital wrote earlier this month.

“We see AI spending trends lifting WFE spend,” Goldman Sachs wrote in December.

“While our current 2026 WFE estimate [is for] spending to be up 10% y/y, we see potential 2026E WFE semicap equipment spend upside,” Mizuho wrote in December.

“Semi Cap is growing quite a bit faster than we expected just a few months ago,” Barclays wrote on January 15.

That’s consistent with the message major chip builders have delivered in recent weeks as they’ve reported quarterly earnings. Foremost among them is chip giant Taiwan Semiconductor, which detailed plans to boost capital expenditure far more than Wall Street was expecting earlier this month to help with production. 

Last week, Intel’s shares plunged after its guidance for the current quarter undershot Wall Street expectations, largely because it was unable to ensure an adequate supply of chips for its customers. Executives bent over backward to say that they, too, were going to boost spending on chipmaking tools.

“We are ramping up tool spending quite a bit in 2026 relative to 2025 to address this supply shortfall,” Intel CFO David Zinser told analysts.

And on Wednesday, Korean chip giant SK Hynix reported record profits and signaled a major boost to equipment spending this year, while ASML, a Dutch maker of chipmaking machines, reported record orders and boosted its sales outlook for 2026.

Of course, all these headlines mean the semicap trade is far from a secret. Prices for the stocks have already ripped upward in recent months, raising the question of whether the Street’s bullish recommendations might be too late.

Since the end of August, for example, Lam Research, which makes tools that deposit or etch away microscopic bits of silicon wafers in order to turn them into chips, has risen roughly 140%. ASML, which makes so-called extreme ultraviolet lithography machines that etch tiny circuitry patterns onto wafers with precisely focused light, is up more than 100% over that period. Tokyo Electron is up more than 50%, and Applied Materials and KLA are both up nearly 80%.

Those gains have left the shares with high valuations, at least as measured by forward price-to-earnings ratios, meaning those buying in now certainly aren’t doing so at the bottom. 

“Semiconductor equipment stocks largely discounted some chunk of the next cycle in like a couple of quarters,” said Jay Deahna, who oversees AI/tech hardware coverage at BWG Global, a boutique research firm that connects institutional investors with industry experts. “One could make an argument that, you know, the valuations in semiconductor equipment stocks are pretty high now after the big run.” 

On the other hand, the sector may still have room to run. And if the explosion of shares at the heart of other AI bottlenecks — AI energy plays or memory chips — are any guide, the run-up could be big. 

Over the last two years, GE Vernova and Vistra — both associated with the AI energy trade — are up 400% and 300%, respectively. Memory chip stock Micron is up over 350% in the last year. And memory play Sandisk is up an astounding 1,000% in just the last six months.     

Deahna says few are certain about just how big the growth and profits for semicap companies will be if the AI building boom continues, which could make historical valuation metrics less dependable reference points for traders and investors. 

“Is this going to be the mother of all cycles? Nobody knows yet,” Deahna said, suggesting that there could be more upside for semicaps to come as institutional investors rush to ensure they don’t miss the boat.  

“Never underestimate the ability of portfolio managers to disregard valuation and rip stocks that are working out of fear of underperforming,” he said. 

As long as the AI infrastructure boom continues — with over $7 trillion expected to be spent through 2030, according to McKinsey — cash will keep spilling into different levels of the AI supply chain. And the smart money seems pretty sure that a torrent is now heading toward chip machinery makers.  

“Yeah, the valuations are kind of reaching nosebleed levels. But I think you still want to be long semicap,” Bernstein’s Rasgon said. “How will I feel about that in six months? I don’t know. But right now, I think you want to be long semicap.”