Morgan Stanley Prefers Lam Research Over Applied Materials, Says Semi Equipment Stocks Are Headed For Rangebound Period

Semiconductor-equipment stocks are in for a rangebound phase, during which they are likely to neither outperform nor underperform, according to Morgan Stanley.

The Analyst

Analyst Joseph Moore changed his industry view for semiconductor equipment makers from Attractive to In-Line.

Moore downgraded Applied Materials, Inc. AMAT from Overweight to Equal-weight and reduced the price target from $58 to $54.

The Thesis

A cautious outlook on memory and memory capital spending is the driver behind Morgan Stanley's move to the sidelines on the semiconductor equipment industry, Moore said in a Thursday note. (See his track record here.) 

The stocks are likely to be rangebound for the next six to 12 months, the analyst said. 

Morgan Stanley is unconvinced that memory and memory capital spending will make a rapid rebound, Moore said. 

" ... The steady ratchet higher in wafer fab equipment estimates could prove inconsistent [with] when the memory cycle peaked." 

Valuation and the potential upside variance of China sovereign spending are likely to limit any potential downside to the stocks "through a period of uncertainty and below-consensus outcomes," Moore said. 

The analyst still calls for growth in wafer fab equipment to $50 billion this year after having a first-quarter peak, and projects a 10-percent decline in 2019. The memory market is at its best since 1995, even as foundry and logic spending have flatlined, Moore said. 

Notwithstanding the certainty expressed by semi-equipment companies of a post-Q3 rebound, Morgan Stanley is cautious about the lack of buyer conviction, with Samsung still not having finalized its 2018 capital budget spending and Western Digital Corp WDC lowering its spending. 

Applied Materials Downgrade 

When Applied Materials reports next week, Morgan Stanley expects it to deliver similar performance to peers: lower short-term numbers but confidence in a recovery. 

Citing reduced conviction in 2019, Morgan Stanley trimmed its P/E expectations for Applied Materials from 15 times to 14 times, leading to the downward price target revision. 

Morgan Stanley said it remains Overweighted on Lam Research Corporation LRCX, although its estimates are below consensus on 2019 EPS. 

Price Action

Applied Materials shares were sliding 2.5 percent to $48.91 at the time of publication and Lam Research was trading down more than 3 percent to $184.17. 

Related Links:

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Photo courtesy of Applied Materials.