Entegris

Entegris reported strong second-quarter earnings as double-digit revenue growth drove margin expansion.

Why it matters: Entegris shares were up 14% as of Aug. 4, as the market reacted to strong results and management's guidance for double-digit year-over-year revenue growth in the second half of the year. The guidance is above FactSet consensus estimates. Entegris is benefiting from the strong growth in the hardware needed to support artificial intelligence. The advanced purity solutions segment is also seeing strong growth from the buildout of new semiconductor fabrication plants and new plant lines at existing facilities as chipmakers transition to advanced chips. We expect the shift to advanced nodes to drive above-market growth for Entegris in the coming years. Most of the company's revenue comes from advanced logic and memory chips. As these grow faster than the global semiconductor market, Entegris should be a winner.

The bottom line: We raise our fair value estimate for wide-moat Entegris to $155 from $145. The increase is driven by near-term higher sales growth versus our prior forecast as we see sales accelerating in both segments in the second half of 2026 and into 2027. Entegris should see profit margin expansion in the coming years as the company ramps up its two new manufacturing plants. Management expects the new Taiwan facility to generate margins in line with the rest of the company by the end of 2027. We expect the US plant will be a couple of years behind. At current prices, we view Entegris shares as fairly valued, with the stock trading less than 10% below our updated fair value estimate and in 3-star territory. Accordingly, we recommend investors wait for shares to offer a larger margin of safety before considering an entry point.

For more on our long-term outlook, see our report, "In the Semiconductor Gold Rush, Chemicals Are Picks and Shovels."

We raise our Entegris fair value estimate to $155 from $145. The increase is driven by near-term higher sales growth versus our prior forecast as we see sales accelerating in both segments in the second half of 2026 and into 2027. We use a weighted average cost of capital assumption of around 9%.

In the near term, we expect accelerating growth as Entegris ramps up its new facilities in the US and Taiwan. The ramp up is currently weighing on profit margins, but we see margin expansion over the next few years as production ramps to normalized levels.

Over the long term, we expect high-single-digit annual revenue growth. We think global semiconductor volume will grow at an annual mid-single-digit rate, on average. We forecast Entegris’ purification solutions and new specialty materials to see volume growth above semiconductor chip production as the firm wins business in more advanced nodes at a mid- to high-single-digit rate. We forecast Entegris will see operating margin expansion from the midteens in 2025 to the mid-20s, similar to its 2021 results. This is driven by more products being used in advanced chips and higher volume, particularly in its new Taiwan and US plants.

In order to develop new products, we expect Entegris to reinvest roughly 9%-10% of sales in R&D, in line with the investment rate over the past several years.

In a downside scenario, where Entegris sees a prolonged volume decline due to an economic slowdown, we forecast revenue to grow at a mid-single-digit annual rate, well below our base case. We also assume operating profit margins excluding amortization average in the low 20s, below our mid-20s midcycle assumption. In this scenario, our fair value estimate would fall to $80.

In an upside scenario, we assume semiconductor growth accelerates and Entegris wins market share in new chips. We forecast revenue to grow at nearly 10% per year and margins expand to the high 20s over time. In this scenario, our fair value estimate would rise to $210.

We award Entegris a Morningstar Economic Moat Rating of wide based on intangible assets and switching costs. Intangible assets stem from the company’s proprietary purity solutions and formulations that are tailored to its customers. Switching costs are driven by the company’s razor-and-blade model for its filters and the high cost of failure for its customers.

Entegris’ moat comes from its ability to help its customers make smaller, more powerful chips with new materials and to provide higher levels of purity for materials and the fab environment. As semiconductors get smaller in size, from the low of 7 nanometers in 2018 to 1.4 nm, the required materials and impurity thresholds become drastically more advanced. For example, a 14 nm chip had a 7 nm defect-size threshold, with metal-impurity contaminants measured in parts per billion. For 1.4 nm chips, the defect size threshold falls to just 0.7 nm, with metal impurity contaminants being measured in parts per quadrillion, a far stricter threshold. This creates the need for more advanced products.

Advanced chips also have more intricate circuitry, or a denser arrangement, which requires more production steps and leads to higher purity requirements. They also use different materials, such as molybdenum deposition instead of tungsten, which requires new purity standards and chemicals.

Intangible Assets

Intangible assets come from differentiated products that enable smaller, more powerful chips to be manufactured at high yields at least in the mid-90s (the percentage of semiconductors that pass inspection). Entegris will work closely with both semiconductor fabricators and equipment makers to develop proprietary, customized solutions that remain Entegris' intellectual property. This establishes valuable intangible assets that allow Entegris to generate economic profit over the lifecycle of its products.

Intangible assets are also supported by Entegris' status as a preferred supplier. Semiconductor fabricators use preferred suppliers for their chemicals and purity solutions and will typically choose from just two to four companies to bid on a purity solution or chemical for a new node. Suppliers that are not on the preferred list usually will not have the opportunity to bid.

Entegris’ advanced purity solutions segment generates the majority of profits and receives the majority of management investment. Entegris’ ability to provide specialized purity solutions allowed it to establish a strong competitive position in the semiconductor fabrication process. Entegris specializes in gas and liquid filtration and purification, where the company has a 60%-70% market share.

This segment also produces microcontamination control products, as well as equipment including microenvironment casings, which hold chips as they move around the fabrication facility. Entegris holds an 80%-90% market share in the casings business. In addition, the company sells mission-critical products, including filters, valves, connection systems, and instrumentation devices. These products ensure semiconductor fabricators can run their processes without contaminants that can disrupt the performance, reliability, and yield of chips. Entegris’ solutions also include purifying the chemicals used to make semiconductors. So, even if a fab chooses an alternate chemicals supplier, it may require the other chemicals company to use Entegris’ purity solutions products. Entegris also sells purity solutions to semiconductor equipment manufacturers, which ensures their equipment includes the optimal chemical delivery, filtration, metrology, and fluid-handling systems.

Entegris’ materials solutions segment benefits from differentiated products and holds a 30%-70% market share depending on the process step. Nearly 100% of revenue comes from consumables directly tied to semiconductor volume production. This business makes chemicals used in high-value manufacturing steps throughout the fab process, including photolithography, deposition, chemical mechanical planarization, etching, cleaning, doping, and packaging. The materials solutions business focuses on developing differentiated products for leading-edge semiconductor nodes.

Switching Costs

After a brief is won, switching costs ensure the durability of economic profit generation as Entegris becomes specified in the fab’s process for a new node. The requirement to use Entegris’ purity solutions can also extend to fab suppliers, including chemicals and materials producers. For semiconductor fabrication, materials precision down to the atomic level is crucial and the required purity levels are extremely high, leaving no margin for error. Short product cycles mean that even minor failures can result in substantial costs. For example, a 1% yield decrease (or increase) in chips can translate to nearly $1 billion in lower (or higher) annual profits. These dynamics incentivize fabs to pay up for the best chemicals and purity solutions.

In advanced purity solutions, switching costs also come from the razor-and-blade model. Around 60% of segment revenue comes from filtration consumables, which are directly tied to semiconductor production volumes and designed directly into equipment. Once Entegris’ filtration equipment is selected and installed, customers must use the company’s liquid or gas filtration consumables. Switching to another supplier would be far more costly than the cost savings, as the fab would have to install new equipment and risk a yield decline.

Entegris’ moat is also supported by colocation of its research and development and manufacturing facilities. This results in the company collaborating with its key semi fab and machine customers as they plan their new product road maps years ahead. Entegris invests 9%-10% of its sales in R&D, a level in line with wide-moat specialty chemicals companies. All in all, we are confident that positive economic profits will prove durable for at least the next 20 years.

Entegris will benefit from growing demand for semiconductors as more semiconductors are needed in electronics, transportation, and to enable artificial intelligence.

Entegris is well positioned to grow above semiconductor demand as its purification solutions and materials are required in higher volume in more advanced chips.

Entegris’ large investment in R&D will enable the company to maintain its position as a leading provider of purification solutions and materials for semiconductors.

New AI models will require less computing power over time, which will lead to slower semiconductor growth.

Quantum computing may disrupt the semiconductor industry, which would hurt Entegris and its main customers.

The acquisition of CMC did not create value, as Entegris paid up for the deal and increased its debt and revenue cyclicality.