Signals from Chipmakers' Q2 Earnings: Demand Stronger Than Three Months Ago, Price Hikes Begin to "Spread"

JPMorgan believes that the Q2 earnings reports from the global semiconductor supply chain have just released an extremely clear bullish signal: industry demand is stronger than it was three months ago, and pricing power is undergoing a substantive "upstream spread."

According to Zhuifeng Trading Desk, JPMorgan systematically reviewed the core signals from the April-June 2026 quarterly reports of major global chipmakers in its research note on August 17. The conclusions were highly consistent and directionally clear: demand strength has comprehensively surpassed expectations from three months ago, and the trend of rising prices is accelerating its "spread" from memory chips to semiconductor production equipment (SPE) and materials.

The report states that the most core logical change is that price increases and profit expansion are no longer the exclusive privilege of memory chip manufacturers; semiconductor production equipment (SPE) and technology material suppliers are steadily increasing their gross margins through price hikes. Driven by strong demand, wafer giants such as Taiwan Semiconductor and Intel are comprehensively raising capital expenditures (Capex); equipment manufacturers have significantly revised up market expectations for wafer fabrication equipment (WFE); and memory giants have locked in their profit baselines for the next few years in advance through long-term agreements (LTAs) spanning up to five years and substantial advance payments.

Chip Giants Comprehensively Raise Capital Expenditures (Capex), Accelerating Advanced Capacity Expansion

Driven by strong demand, leading global chip manufacturers are intensively raising their capital expenditure plans. Funds are mainly flowing into higher-cost front-end equipment, while demand for back-end equipment is also growing steadily.

• Taiwan Semiconductor: Raised its calendar year 2026 (CY2026) capital expenditure plan by approximately 15%, significantly increasing it from $52-56 billion to $60-64 billion (a 52% year-over-year surge based on the midpoint). Of this, 70-80% of the funds will be used for advanced process technologies. Management explicitly stated that they are working closely with semiconductor production equipment (SPE) manufacturers to ensure that equipment supply does not become a bottleneck for capacity.

• Intel: Raised its CY2026 capital expenditure plan from flat year-over-year (approximately $18 billion) to $20 billion (+11% year-over-year), with equipment capital expenditures expected to increase by 40% year-over-year, and further significant growth anticipated in CY2027. Funds are mainly directed towards front-end equipment in the United States, while increasing investment in back-end equipment related to EMIB-T. Its 18A node will enter mass production at the end of 2026, 14A is planned for risk production in the second half of 2027, and mass production in 2028.

• SK Hynix and Samsung: SK Hynix announced a CY2026 capital expenditure plan of 40 trillion Korean won (+45% year-over-year) and accelerated the mass production ramp-up of M15X. The cleanroom for Yongin Fab 1 will be enabled in early 2027. On the Samsung Foundry side, Taylor Fab 1 will start as scheduled in 2026 and gradually ramp up 2nm capacity, while Taylor Fab 2 is planned to start construction this year, with mass production in 2030.

Semiconductor Equipment (SPE) Market Expectations Significantly Revised Up, Price Hikes Boost Gross Margins

Compared to three months ago, the market outlook for wafer fabrication equipment (WFE) has become clearer. JPMorgan believes that equipment manufacturers not only see a larger market size but, more importantly, are successfully passing on costs and boosting gross margins through "value-based pricing strategies" (i.e., price hikes).

WFE Market Size Expectations Comprehensively Raised: Tokyo Electron raised its WFE market expectation for CY2026-27 from $150-170 billion to no less than $150 billion for CY2026 and no less than $190 billion for CY2027.

Lam Research and KLA both raised their CY2026 expectations to the lower end of the $150 billion range. SCREEN Holdings raised its CY2026 expectation (mainly targeting memory chips) to a year-over-year growth of over 20% (at least $140 billion).

Increased Equipment Demand Density Driven by AI: Lam Research pointed out that given the rising share of semiconductors in AI infrastructure, the estimated WFE demand corresponding to every $100 billion of AI investment has been raised from approximately $8 billion to $9-10 billion.

Gross Margin Expansion (Core Profit Signal):

• Tokyo Electron expects that through measures such as price hikes, its gross margin could reach 50% by the beginning of fiscal year 2027 (47% in April-June 2026).

• Lam Research's Q2 gross margin reached 52% (50% in Q1), with a target of achieving a 55% gross margin by providing high value-added products.

• Applied Materials (AMAT)'s gross margin has risen by approximately 300 basis points over the past three years, mainly attributed to successful value-based pricing strategies. The gross margin of its Semiconductor Systems segment has exceeded 55%.

• KLA plans to increase prices by adding value to new products, expecting margins to rise as it enters 2027.

JPMorgan believes that the continuous upward revision of WFE market size forecasts, coupled with the substantive improvement in equipment manufacturers' gross margins, means that the earnings elasticity of the semiconductor equipment industry is being systematically underestimated.

Indium Phosphide (InP) Substrate Supply-Demand Gap Exceeds 30%, Capacity Expansion and Long-Term Agreements Lock In Supply

In the technology materials sector, indium phosphide (InP) substrates are facing extreme scarcity, with suppliers frantically expanding capacity and shifting towards larger sizes (6-inch).

• Extreme Supply-Demand Imbalance: Both Lumentum and Coherent stated that demand is stronger than before. Lumentum pointed out that the current supply-demand gap exceeds 30%. As InP substrate supply is the biggest constraint, both companies have signed long-term agreements (LTA) with AXT.

• Multiples-Level Capacity Expansion: JX Advanced Metals plans to expand its InP substrate capacity by 7-10 times by 2030. AXT aims to triple its capacity year-over-year by the end of 2026 (quarterly sales reaching $60 million) and more than double it year-over-year by the end of 2027 (over $130 million).

• Technology and Cost Optimization: Coherent is shifting to 6-inch substrates, which can quadruple output compared to 3-inch substrates, halve costs, and maintain high yields. AXT has also made significant progress in the development of 6-inch substrates, which have extremely high technical barriers.

Details of Memory Chip Long-Term Agreements (LTAs) Revealed, Advance Payments Lock in Profits for Coming Years

Global memory chip manufacturers are gradually disclosing details of their long-term agreements (LTAs). JPMorgan believes that these agreements are not only long-term but also include substantial advance payments, greatly reducing price volatility risks and providing core support for the valuation re-rating of memory giants.

• Samsung Electronics: Has finalized 5 LTAs with data center customers, with another 5 in the final stages of negotiation. It adopts rolling contracts based on a 5-year term and expects to receive substantial advance payments.

• SK Hynix: Has signed 10 contracts, based on a 5-year term with advance payments, aiming to use contracts to reduce price volatility.

• SanDisk: Has signed 8 contracts (3 of which were signed with US hyperscale cloud computing vendors), with an average term of 4 years (maximum 5 years), and some customers have already inquired about contracts longer than 5 years. These contracts are usually based on advance payments, covering 50% of its bit demand for fiscal year 2027 and about two-thirds of the demand for fiscal year 2028.

• Stunning Profit Floor: SanDisk management revealed that even on the floor price basis of a variable pricing structure (including price caps and floors), its gross margin can still reach approximately 80%.

The report points out that the accelerated implementation of LTAs provides a "floor price" protection for the earnings of memory chip manufacturers. The detail disclosed by SanDisk that "the floor price corresponds to approximately 80% gross margin" is particularly critical, meaning that profitability still has strong support even in the most pessimistic pricing scenarios. As more LTA details are disclosed, the logic of valuation restructuring in the memory chip sector is expected to gradually gain market recognition.