Chip equipment makers: who stays cheap despite the AI wave

2026-07-07 · By Lubin Danilo, founder of Lubin Investment

Analyze a stock on Lubin Investment

Six companies tied to semiconductor manufacturing show comparable or high quality scores in my screener, but radically different valuations: from 2.3 times free cash flow for TSM to over 95 times for Applied Materials. The same artificial intelligence investment wave doesn't cost the same at all depending on the company.

Key takeaways

• Six companies tied to chip manufacturing trade between 2.3 and over 95 times their free cash flow, despite a shared AI investment wave.
• TSM (foundry) and KLA Corporation (metrology) are the cheapest of the group, despite high quality scores.
• Applied Materials and Lam Research are the most expensive, with quality scores equal to or lower than their cheaper peers.
• The price paid for the same investment theme (AI) therefore varies enormously by company, not just by sector.

The same sector, different businesses

These six companies operate at different stages of chip manufacturing. TSM physically manufactures chips on behalf of clients like Nvidia or Apple (the foundry model). ASML makes the lithography machines that etch circuits onto silicon wafers. KLA Corporation and Advantest check and test chip quality at different stages. Applied Materials and Lam Research make deposition and etching equipment used in manufacturing itself.

Chart comparison

The gap between TSM and Applied Materials

TSM, which I've already analyzed on my site, passes 9 of the 10 criteria in my screener and trades at barely 2.3 times its free cash flow, one of the lowest multiples in my entire tracked universe for a company of this quality. Applied Materials, with a lower quality score (6 out of 10), trades relatively over 40 times more expensively. That gap illustrates well that an investment theme (AI, semiconductors) alone doesn't determine the price paid: market structure, competitive position, and market perception matter just as much.

KLA Corporation, the group's anomaly

KLA Corporation, which I analyzed separately, stands out with a rare combination in this group: a high quality score (9 out of 10) and a low valuation (7.7 times free cash flow), nearly as attractive as TSM. That's a profile worth digging into more than the more expensive, more talked-about names in the same sector.

Why such price dispersion

Several factors explain this dispersion. First, competitive structure: TSM dominates its foundry business with a technological lead that's hard to catch up on, which could justify a higher price, not a lower one; its low price rather reflects perceived geopolitical risk (Taiwan's exposure to China) that the market prices in. Second, how directly a name is associated with the artificial intelligence narrative in investors' minds: Advantest and ASML are often cited as AI 'pure plays,' which seems to attract a premium that KLA and TSM, equally exposed, don't receive to the same degree.

How I use this comparison

This table isn't a buy recommendation on the cheapest names: each low valuation can hide a real risk (geopolitical for TSM, sector cycle for KLA) that needs understanding before concluding it's a good deal. But it illustrates a central principle of my method: within the same sector riding the same narrative, the price paid can vary enormously from one company to another, and doesn't necessarily track each company's relative quality.

What I take away from this

Investing in 'semiconductors' or 'AI' as a single theme masks considerable price gaps between companies of comparable quality. TSM and KLA Corporation offer a notably more attractive quality-price combination than Applied Materials or Lam Research in this comparison, a reminder that the most talked-about name in the media isn't always the one offering the best value.

FAQ

Why does TSM trade so cheap despite its dominant position?

Its low valuation mostly reflects perceived geopolitical risk (Taiwan's exposure to China) that the market prices in, rather than doubt about its fundamental quality.

Which semiconductor equipment maker offers the best value?

KLA Corporation stands out with a high quality score (9/10) and a low valuation (7.7x), a rare combination in this group.

Why is Applied Materials so expensive despite a lower quality score?

The market associates certain names more directly with the artificial intelligence narrative, which can inflate their valuation regardless of their relative quality score.

Is this comparison a buy recommendation?

No, each low valuation can hide a real risk (geopolitical, sector cycle) that needs understanding before concluding it's a good deal.

What's the difference between TSM, ASML, and KLA Corporation?

TSM physically manufactures chips (foundry), ASML makes the lithography machines that etch circuits, and KLA Corporation checks chip quality at different stages.

Analyze a stock on Lubin Investment

About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).