Microsoft’s planned $80 billion data center investment highlights the growing need for advanced semiconductor chips to power AI and cloud computing. 

Ultra Clean (UCTT) provides critical subsystems and cleaning services that are essential for producing these cutting-edge chips. 

Although the market is skeptical about the company’s return to higher profitability, the company’s strong ties with major equipment makers like Lam Research and Applied Materials position it well to benefit from ongoing data center expansion. 

Despite cyclical risks, the long-term demand for more advanced semiconductors suggests continued opportunity for Ultra Clean.

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Last week, we talked about a big beneficiary of continued data center investments and explained that Navitas (NVTS) could see huge growth if they can adapt their tech to data centers.

Despite concerns about overspending on artificial intelligence infrastructure, companies are pressing ahead with significant investments in data centers.

Microsoft (MSFT) has announced its plans to invest $80 billion in data centers during its fiscal year 2025.

The investment will focus on expanding the infrastructure needed to handle the massive computing power AI demands.

Microsoft’s Vice President Brad Smith explained that this level of spending is necessary to support AI advancements, as the technology requires specialized, large-scale data centers to function effectively.

This continued spending signals sustained demand and revenue opportunities for suppliers supporting these projects.

Today, we turn our attention to another promising beneficiary of data center expansion, Ultra Clean (UCTT).

Modern data centers rely on advanced chips to store and process data. These chips, mostly produced in foundries around the world, are becoming more complex each year.

When foundries manufacture semiconductors, they need extremely controlled environments and specialized products to keep contamination risks as low as possible.

This is where Ultra Clean comes in… 

The company provides critical subsystems and services that ensure foundries can maintain ultra-clean conditions, essential for producing cutting-edge semiconductors.

On the product side, the company manufactures and engineers components for semiconductor equipment makers.

These components include modules and subsystems for large-scale production tools that handle everything from wafer processing to final assembly steps.

Many of Ultra Clean’s customers are large original equipment manufacturers (OEMs) in the semiconductor space, which means the company’s products often end up on advanced chip fabrication lines for big industry names.

The second segment, services, focuses on ultra-high purity cleaning and part analysis. This side of the business supports semiconductor makers by cleaning sensitive parts used in the production process.

When you’re building chips at nanometer scales, even the smallest particle can cause a defect. Ultra Clean helps foundries minimize those risks.

While the services segment may be smaller in terms of revenue, it tends to have higher margins than the product side.

This balance of a high-volume product segment and a higher-margin service segment is a key advantage for Ultra Clean in a competitive industry.

The market, however, seems skeptical that the company will return to its earlier levels of profitability.

After a weaker performance in 2023, some investors appear convinced that the company’s best days are behind it.

We can also see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform return on assets ”ROA” will stay around 8%, a far cry from 16% in 2022.

There are strong reasons to think otherwise, especially when considering the overall direction of the semiconductor industry.

Data centers continue to scale up to meet the demands of artificial intelligence, cloud computing, and other data-intensive applications.

Each new wave of data center construction requires an ever-growing supply of chips, and by extension, the specialized equipment and services to produce those chips.

Ultra Clean’s strong ties to major semiconductor players reinforce its potential. 

Two of its biggest clients are Lam Research and Applied Materials, both well-known for their leadership in wafer fabrication equipment.

Serving these large, established customers puts the company in a prime position to capture new business as chipmakers expand.

Although Ultra Clean does carry certain risks, its overall prospects remain favorable.

The industry is cyclical by nature, but long-term trends in data center demand, AI development, and the push for more advanced memory chips suggest a steady need for additional fabrication capacity.

When foundries spend more on expansion, companies that provide critical manufacturing systems and services, like Ultra Clean, stand to gain.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research