Semiconductor stocks included in the PHLX Sox index have dropped by about 17% for the year to date, with the semiconductor capital equipment (SCE) makers’ stocks dropping by 25%. That downturn for the equipment makers comes despite growing backlogs, a clearer view of what to expect in the second half of this year and projected expenditures of around $100 billion in equipment. What about the industry in 2023?
From this starting point, analysts John Pitzer and Anthony Sourial of Credit Suisse looked at whether the decline was based on macro concerns like rising interest rates and geopolitical tensions or “growing concerns” that a peak in the chip industry is upon us. In fact, there is an ongoing debate over whether sales will fall at all in 2023. In the analysts’ view, SCE stocks are already “embedding” wafer fab equipment sales in a range of $75 billion to $80 billion, a dip of 20% to 25% below 2022 projected sales.
The Credit Suisse team takes a different view:
[W]e have a bias to lean into Semi Cap Equipment stocks as we view these companies as having some of the highest barriers to entry in the Semi Ecosystem and as being strategically important to the global economy and increasingly to nation-states looking to mitigate geopolitical risk with domestic production of chips. …
While [near-term] macro and an inventory correction in Semis are risks, stocks seem to be pricing in much of the potential downside.
Here is a look at three SCE makers’ stocks and the stocks of four chipmakers that purchase that equipment. Included are Credit Suisse’s 12-month price targets and overall ratings, along with the downside risks to the outlook.
Applied Materials Inc. (NASDAQ: AMAT) has a price target of $175 and an Outperform rating. The analysts say the stock is “relatively cheap” based on 2022 forward price-to-earnings ratio, a target of 80% to 100% free cash flow and a strong investment cycle in OLED display technology. Downside risks include “material weakness in the semicap cycle due to disappointments in electronics end-demand, or execution issues causing lower peak earnings than we expected.”
The stock’s 52-week range is $112.14 to $167.06. Shares traded down about 4.2% Thursday morning to $123.21. At that price, the upside potential is 42% based on Credit Suisse’s target.
KLA Corp. (NASDAQ: KLA) has a Credit Suisse price target of $430 and an Outperform rating. KLA’s long-term earnings per share (EPS) target is about $25. Downside risks to the price target include increased competition from Applied Materials, a saturated market from process control equipment and Credit Suisse’s own possible underestimate of the oversupply risk in memory chips.
The stock’s 52-week range is $235.80 to $457.12, and shares recently traded at $296.20, up about 2.9% for the day. At that price, the upside potential based on the $430 price target is 45%.
Lam Research Corp. (NASDAQ: LRCX) has a price target of $750 and an Outperform rating. The analysts say, “the company could potentially continue to outgrow peers based on several factors.” Downside risks include oversupply in memory chips, excess inventory in the logic industry, weakness in end-user demand due to macroeconomic concerns and lower margins among other things.
The stock’s 52-week range is $379.05 to $731.85. Shares traded at $491.49 Thursday morning, down about 5.2% on the day. At that price, the upside potential based on the $750 price target is 52.6%.
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