Analysts at Raymond James see strong fundamentals continuing to support the high valuations of semiconductor capital equipment (WFE) stocks.
While the sector is up 46% year-to-date, exceeding the SOX index, Raymond James maintains a positive stance heading into Semicon West due to several key drivers.
"WFE is set to recover in 2Q24 and we expect at least high-single digit growth in 2025/2026," they project. This growth is attributed to a combination of factors including cyclical recovery, long-term demand for next-generation artificial intelligence (Gen AI), geopolitical tailwinds, and increased competition in the foundry space.
The analysts point to recent capex announcements by Micron as a sign of industry-wide investment. They anticipate further increases in Memory and Advanced Logic spending throughout the earnings season. While acknowledging potential near-term slowdowns in China, they believe these are already factored into their models.
Raymond James expects the geopolitical environment to remain favorable for the chip industry, with government subsidies around the world seen as a long-term trend. "We believe it's too early in the cycle to get overly cautious despite premium valuations," they write.
The note highlights strong growth prospects for WFE spending, driven by Gen AI's exponential demand for advanced chip manufacturing. Data center and Edge AI are seen as key drivers.
While NAND spending is currently depressed, Raymond James anticipates a gradual recovery in WFE for this segment by 2026.
Based on their bullish outlook, Raymond James raised price targets for industry leaders ASML Holdings (ASML) ($1,300 from $1,100), Applied Materials (NASDAQ:AMAT) ($275 from $235), KLA Corporation (NASDAQ:KLAC) ($975 from $875), and Lam Research (NASDAQ:LRCX) ($1,250 from $1,060). They argue that current valuations are justified due to significantly higher earnings and free cash flow compared to previous downturns. Analysts expect upward earnings revisions to continue driving stock prices higher.