Citi adopted a more cautious outlook on semiconductor equipment stocks, revealing in a note Monday that it has downgraded two names while highlighting concerns over a "mid-cycle correction" in the first half of 2025.
The investment bank now sees weaker consumer demand across PCs, smartphones, and autos, contrasting with the continued strength in server AI demand.
"We update our sector view and believe the equipment group is heading into a mid-cycle correction in 1H25," Citi analysts wrote.
As a result, they anticipate only modest growth of 5% in wafer fabrication equipment (WFE) for 2025, with memory demand down 8% year-on-year and NAND recovery delayed until the second half of 2025.
Citi downgraded MKS Instruments (NASDAQ:MKSI) and Nova Measuring Instruments (NASDAQ:NVMI) from Buy to Neutral, citing worries about the sustainability of growth.
In particular, the push out of NAND recovery poses a concern for MKSI, which is "over-indexed to" that market. Analysts also noted that continued weakness in PCs and smartphones further challenges MKSI's prospects.
However, Entegris (NASDAQ:ENTG) was upgraded to Buy, with Citi seeing the company as a more defensive play.
"We believe Entegris wafer starts driven business is less cyclical than WFE market," the bank stated, noting the company's leading-edge positioning and improved gross margins post-acquisition.
Citi also lowered price targets for industry giants Applied Materials (NASDAQ:AMAT), Lam Research (NASDAQ:LRCX), and KLA Corporation (NASDAQ:KLAC) by around 10% to $217, $893 and $900, respectively, while maintaining a positive long-term view on these stocks.
Analysts prefer KLA over its peers due to its higher exposure to the foundry and logic sectors, which are expected to grow the fastest in 2025.
For the sector overall, Citi flagged several downside risks, including macroeconomic weakness, an over-reliance on AI server demand, and geopolitical tensions between China and Taiwan.