Shares of a trifecta of chipmakers all traded lower on Thursday after receiving the thumbs down from UBS analyst Timothy Arcuri, who downgraded three different companies and lowered two of their one-year price targets on what he sees as a near-term spending pullback on wafer fab equipment that will impact the entire group.
In a research note to clients, Arcuri downgraded Applied Materials (AMAT) - Get Report , Lam Research (LRCX) - Get Report and KLA Corp. (KLAC) - Get Report to sell ratings from neutral, neutral and buy, respectively. He cut his expected 12-month price target for Applied Materials down a buck to $48 from $49 and his price target on KLA to a Wall Street low of $140 from $192 amid what he sees as headwinds picking up in the first half of next year on hardware makers cutting back their spending on wafer fab equipment.
It was roughly the same idea for Lam Research, though Arcuri held onto his $240 price target as he expects less downside in revenue. The company has already been hit by the wafer-fab-equipment slowdown, which has impacted its foundry/logic business, and its revenue is generally more exposed to a wider array of other types of memory chip sales than its peers.
Wafer fabrication is a procedure composed of many repeated sequential processes to produce complete electrical or photonic circuits on semiconductor wafers. Examples include production of radio frequency (RF) amplifiers, LEDs, optical computer components, and CPUs for computers.
Applied Materials in mid-November said its fiscal fourth-quarter adjusted earnings came in at 80 cents a share, down from the same period last year but ahead of consensus forecasts. The company also said it expects to see stronger fourth-quarter results, particularly in its wafer-fab equipment business.
Lam Research also posted a top- and bottom-line beat in its most recent fiscal quarter, with revenues of $2.17 billion and non-GAAP per-share earnings of $3.18 both coming in ahead of Wall Street forecasts. It too raised its fourth-quarter revenue forecast to $2.5 billion and non-GAAP earnings per share to between $3.60 and $4.
To be sure, Arcuri's expectations stand in stark contrast to Citi analyst Atif Malik, who earlier this month reiterated his buy rating on Lam Research and raised his one-year price target to a Wall Street high of $330 from $282.
"We believe that improving memory supply-demand balance will continue to lift Lam's outlook for NAND and DRAM investments into 2020," Malik wrote. "Overall, we like stocks such as LRCX that are more leveraged to higher memory spend growth next year as foundry and logic spend likely flattens in 1H20."
"This is still very much a strong 2020-outer year earnings-driven story as the cycle moves back into their favor," Cramer and team wrote. "We plan to update our price target accordingly in the coming days to a level that is well above our current $230 price."
Shares of Applied Materials were down 4.95% at $56.70 in afternoon trading on Thursday. Shares of Lam Research were down 3.85% at $263.58 while shares of KLA were down 7.53% at $160.60.