Why Stifel Is Positive On Semiconductor Equipment Makers Lam Research, KLA

The recent pullback in the shares of semiconductor equipment makers has rendered their valuations attractive, according to a Stifel analyst. 

The Semi Capital Equipment Analyst: Patrick Ho upgraded shares of Lam Research Corporation LRCX from Hold to Buy with a $352 price target. 

The analyst also upgraded KLA Corp KLAC from Hold to Buy with a $211 price target. 

The Semi Capital Equipment Thesis: Despite concerns on the near-term memory spending front, Stifel is incrementally positive on 2021 wafer fab equipment spending from a fundamental standpoint, Ho said in a note. 

Overall WFE spending will be up in 2021 and is on track to touch $60 billion, representing a new record, thanks to increases across all market segments, the analyst said. 

While there could still be some downside given the uncertainty over China and potential near-term memory spending cuts, there is more upside when looking ahead into 2021, he said. 

DRAM is likely to end relatively flattish or slightly down in 2020, and could rebound in 2021, Ho said.

NAND flash equipment spending could also see modest growth in 2020, the analyst said. 

"While we believe some push outs may still occur, we believe 2021 will see stronger growth as improved fundamentals and the need for new capacity will be the drivers for new equipment spending." 

See also: Morgan Stanley's Semiconductor Picks: Qualcomm, Qorvo, Lam Research Over Intel, Nvidia

Lam Research Shares Deserve Premium, Stifel Says: Shares of Lam already deserve a premium, given its large-cap status and its leading share in the etch marketplace, Ho said.

The stock's valuation is once again at more attractive levels in terms of metrics such as P?Eand EV/sales, the analyst said. 

Lam historically has strong exposure to NAND flash market, and it can strongly outperform the overall market, he said. 

One of the key drivers for growth is Lam's services/installed base business, which has very healthy margins and strong cash flow generation, Ho said. 

KLA To Deliver Above-Average Growth, Stifel Says: Continued leading-edge investments by the likes of Intel Corporation INTC, Taiwan Semiconductor Mfg. Co. Ltd. TSM and Samsung will be key contributors to KLA's growth, Ho said. 

"We believe process control intensity rises at each advanced node and with several fab projects on the horizon (which also includes pilot investments for 3nm), these will be key drivers for KLA to deliver above-average growth versus the industry," the analyst said.

LCRX, KLA Price Action: At last check, Lam shares were edging up 1.44% to $311.64, while KLA was trading 0.31% higher at $179.51.

Related Link: Return On Capital Employed Overview: Lam Research

Photo courtesy of Lam Research.