Goldman: Buy Lam Research And Applied Materials

• Lam Research Corporation LRCX shares are down 21 percent year-to-date, while Applied Materials, Inc. AMAT shares have lost 42 percent.
• Goldman Sachs analyst James Covello maintained Buy ratings on both the companies. The price target for Lam Research is set at $100, while that for Applied Materials is at $22.
• Following the recent downturn in SPE stocks, Covello believes that the capex concerns appear overdone.

SPE stocks have declined 5 percent month-to-date, versus a 3 percent decline in semis and a 1 percent downturn in S&P. SPE stocks are down 20 percent year-to-date, while semis have lost 8 percent and S&P has declined 5 percent.

Analyst James Covello commented, “We believe the most recent correction has been driven by concerns that Samsung and Hynix capex could be weaker in 2016.”

In the report Goldman Sachs noted the following:

1. Too early to predict 2016 capex – “It is too early to have a strong view on 2016 capex but our base case assumption is for flat to up 10%. We believe that a potential decline in DRAM capex will be more than offset by higher NAND and logic capex,” Covello wrote.
2. NAND makers to invest in 3D – Even against the backdrop of a weak NAND fundamental environment, NAND makers would continue to invest in 3D technology due to “the cost and performance advantages of next-gen 3D products over planar.”
3. “Memory manufacturers have previously messaged for lower, more rational spending plans while continuing to spend at record levels,” Covello said.
4. Stable front-end SPE book-to-bill data - Front-end book-to-bill data for SPE companies in North American rose from 1.05 in July to 1.11 in August, marking the highest level since November 2013. Front-end orders grew 8 percent m/m and 34 percent y/y.
5. Decline in SPE shares - SPE stocks appear to have overreacted to potential for estimate cuts. These stocks are trading at a 30 percent discount to semi stocks. “In other words: even if SPE 2016 EPS estimates are 30% too high, SPE stocks would still be cheaper than Semis,” Covello pointed out.

Both Lam Research and Applied Materials is on the Goldman Sachs Conviction List. “We note that LRCX short interest is now at a one-year high,” the analyst added.