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KLA, Applied Materials Sink as UBS Turns Bearish After Rally

(Bloomberg) -- UBS lowered its view on a trio of semiconductor production equipment companies, forecasting “downside for the entire group” given trends with wafer fab equipment.

The firm expects wafer fab equipment run-rates to peak in the near term and then contract for a few quarters. Companies related to foundry and logic products are “the most extended and vulnerable to these run-rate headwinds,” analyst Timothy Arcuri wrote.

KLA Corp. was cut by two notches, to sell from buy, and its price target was dropped to a Street-low of $140 from $192. Both Applied Materials Inc. and Lam Research Corp. were downgraded to sell from neutral.

All three stocks have been strong gainers in 2019, easily outperforming the broader market, as well as the Philadelphia Semiconductor Index. Lam Research has nearly doubled thus far this year, while KLA is up more than 80% and Applied Materials has risen more than 70%. The SOX, as the chipmaker benchmark is known, is up more than 45% thus far this year.

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Shares of Applied Materials fell as much as 6.7% on Thursday, while KLA shed 7% and Lam dropped 4%.

Arcuri cited these gains in his downgrades, noting that KLA “has been among the top 5 semis stocks” over the past six months, and that Applied Materials recently saw “a big post-earnings stock move.”

Writing about KLA, Arcuri wrote that even though the company’s revenue base has become more diverse, “its core semis exposure remains foundry/logic which we see as un-sustainable in the near-term driving some risk to estimates” through the first half of 2020. While there are “many longer-term positives” at KLA, he said, “the run-rate math is most worrisome for its core foundry/logic segment.”

Applied Materials’ price target was trimmed by $1 to $48, also a Street-low view. UBS forecast “some risk to estimates” through 2020 “given a very extended run-rate in foundry/logic.”

UBS affirmed its $240 price target on Lam Research, below the $267 average of analysts tracked by Bloomberg. While the company is facing the same headwinds as the other two stocks, Lam also has greater revenue exposure to the memory market. “So while overall WFE run-rate likely comes down, LRCX should have less downside as memory WFE is already at cyclical lows,” Arcuri wrote.

Subsequent to UBS’ commentary, Citi called the report “an early Xmas gift,” writing that the share decline spurred by the downgrades created “a buying opportunity as we expect stock outperformance to continue through 2020.”

Analyst Atif Malik agreed “with part of the thesis that foundry + logic investments are flattening out,” but added that it didn’t think the run-rate for WFE had peaked. “Despite a strong run this year, group valuation on peak earnings power looks attractive,” and it would buy any weakness in Lam Research.

(Adds Thursday trading in fifth paragraph and UBS comments in final paragraphs)

To contact the reporter on this story: Ryan Vlastelica in New York at rvlastelica1@bloomberg.net

To contact the editor responsible for this story: Catherine Larkin at clarkin4@bloomberg.net

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.