Semiconductor makers, unable to keep up with rising demand from automakers and other buyers, were expected to pour nearly $150 billion into 2021 capital spending projects to expand capacity. Around half that spending would be used to purchase and install the machines needed to produce more chips.

The companies that make those machines had a solid run in 2021, and 2022 is expected to be even better. The world’s largest foundry is Taiwan Semiconductor (TSMC), and the company is forecast to increase its capital spending budget for 2022 by 40% year over year, from around $30 billion to as much as $42 billion. And that is just the beginning.

Jefferies analysts Mark Lipacis, Vedvati Shrotre and Masahiro Nakanomyo published a research report Wednesday initiating coverage on three equipment makers they think will lead growth in their respective market segments.

Applied Materials Inc. (NASDAQ: AMAT) was initiated with a Buy rating and a price target of $197. Based on Tuesday’s closing price of $158.36, Jefferies’ price target implies upside potential of 24.4%. According to data from Koyfin, Applied’s median price target is $166 and the high target is $208. Of 29 brokerages covering the stock, 20 have assigned ratings of Strong Buy or Buy and the other nine have Hold ratings.

Jefferies initiated coverage of Lam Research Corp. (NASDAQ: LCRX) with a Buy rating and a price target of $869, implying an upside of 22% to Tuesday’s closing price of $712.00. Lam’s median price target is $725, and Jefferies’ $869 target is the highest. There are 26 brokerages covering the stock, and 16 rate the shares a Buy or Strong Buy and the other 10 at Hold.

KLA Corp. (NASDAQ: KLAC) also was initiated with a Buy rating, and it was given a price target of $515. Based on Tuesday’s closing price of $431.24, the implied upside for the stock is 19.4%. The stock’s median price target is $450, and Jefferies has set the new high target. Of 22 brokerages covering the shares, 14 have a Buy or Strong Buy rating and the other eight rate the stock at Hold.

Perhaps the most interesting comment in the analysts’ report is what they have called “Trailing Node Buildout,” the growing demand for less-than-bleeding-edge semiconductors. Here’s what they say:

A Tectonic Shift to a Computing Era w/ 10s of billions of IoT [internet of things] devices coupled w/ 15 years of under-investment in trailing nodes, layers demand for trailing node MCU [microcontroller units] + analog ICs [integrated circuits] on top of leading edge logic and memory ICs.

The Jefferies analysts expanded on what they have called “The 4th Tectonic Shift in Computing”:

We believe that the computer industry is transitioning from a Cellphone / Serial Processing era, with billions of cellphones, to an IoT / Parallel Processing era, with 10’s of billions of IoT devices made with chips on trailing nodes.

They note that in 2021, TSMC boosted its spending on trailing node production from 10% of total capital spending to 20% year over year to meet the greater demand for specialty chips. Their definition of IoT devices includes automobiles and other industrial markets, not only radar or lidar modules, and sensors.

Another important aspect of Jefferies’ outlook is what the analysts call the nationalization of semiconductor manufacturing. Over the next five years, global government incentives are forecast to total approximately $84 billion. TSMC, Intel, Micron, SK Hynix and Samsung already have announced capital expenditure plans valued at around $109 billion annually. Spending on equipment is expected to account for more than 58% of all capex over the next two to three years.

One general comment Jefferies’ analysts make about these three companies is that they “have morphed into extremely well run cash flow and capital return machines, only now they also have secular growth stories to go with them.”

In specific comments on Applied Materials, Jefferies notes that the company’s share of the deposition market is 43% and the company derives about 50% of its revenues from deposition equipment. Of the three companies, Applied Materials is forecast to post the highest 2022 free cash flow growth per share at 34%.

KLA leads the industry with a 50% share of the process control market, from which the company derives about 90% of its revenue. It is the most dominant company in its sector and the most profitable of the three firms in the Jefferies report. The analysts also think that KLA “has an opportunity to increase its capital return model to 100% from 70%” of free cash flow.

In the etching market, Lam Research has a 36% share, along with exposure to 60% of the volatile memory chip industry. The company’s exposure to 33% of the services industry is an “extremely consistent and predictable business, offering a nice counterbalance to the potential swings in the memory business.”

Applied Materials traded down about 1% Wednesday morning, at $156.72 in a 52-week range of $889.28 to $163.02. The high was posted last week. The dividend yield is 0.60%.

KLA traded down by less than 1% to $429.62, in a 52-week range of $261.81 to $442.44. KLA’s high was also reached last week. The company’s dividend yield is 0.97%.

Shares of Lam Research traded down about 1.2%, at $703.65 in a 52-week range of $481.05 to $731.85. That high was posted Tuesday. The company’s dividend yield is 0.84%.

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