Wall Street may be too upbeat about the potential for chip-equipment stocks, according to a Barclays analyst.
Blayne Curtis of Barclays said Monday that he was “doubling down” on his cautious outlook about this pocket of the chip industry, as he downgraded shares of Applied Materials Inc.
and KLA Corp.
to underweight from equal weight.
“We see the Semi Cap space as now the biggest disconnect in the group,” Curtis wrote, noting that he still expects a down year for wafer-fab equipment spending in 2024, “despite the expected positive tones through earnings.”
He noted that consensus expectations for wafer-fab equipment spending call for $92 billion in 2023, up 4%, and $96 billion in 2024, up 5%. In contrast, Curtis’s estimates call for $78 billion in 2023 and $65 billion in 2024.
“We still like the semi-cap segment over a long horizon but just don’t see the case to own any of the names on effectively 2025 earnings with earnings headed lower over the next two years,” he wrote.
Curtis acknowledged that investors can “point to a ton of drivers to make an argument as to why chips are getting more expensive to produce and why that is positive for the semi-cap segment,” and while he’s in agreement on that point, he also said “there is too much capacity already in place as evidenced by low semi/foundry utilizations and rising inventories.”
Another argument from chip-equipment bulls is that the government will fund build-outs in excess of needed capacity, but Curtis isn’t quite sure trends will play out that way.
“We believe the US CHIPS Act has actually lost some momentum as the bill was signed at the top of the market and now the government is placing greater scrutiny on what they are actually getting for their money,” he wrote. “There are efforts in other countries that we don’t want to discount but ultimately capacity is only added when it is needed and any projects funded by the government will just take from capacity planned elsewhere.”
Despite the more bearish tone at Barclays, Applied Materials shares were ahead 1.7% on Monday, while KLA shares were up 1.2%.
Curtis also downgraded shares of Veeco Instruments Inc.
a smaller semiconductor-equipment company, to equal weight from overweight, writing that he likes the company’s longer-term story but thinks headwinds for the category are “likely too much to overcome for the stock.”
Veeco’s stock is off 1.3% in Monday morning action.
He’s more upbeat about other corners of the chip world, upgrading shares of Advanced Micro Devices Inc.
Skyworks Solutions Inc.
and Qualcomm Inc.
to overweight from equal weight Monday.