Lam Research and KLA Hope to Remain Insulated from Chip Slump

Companies that make equipment used to produce semiconductors, such as Lam Research Corp (LRCX) and KLA Corp (KLA), are hoping to avoid any further slump in chip stocks.  Optimism improved about semiconductor equipment makers after ASML Holding NV, Europe’s largest semiconductor equipment producer, said today that Q4 sales will likely be higher than consensus as demand remains strong for its advanced chip-making machines.

Chipmakers have been cutting their plans for new equipment due to the slowdown in their business and new U.S. restrictions on doing business with China.  Last week, Applied Materials (AMAT), the world’s biggest chip-equipment maker, warned that the new U.S. export restrictions of semiconductor chips to China would cut its Q4 sales by hundreds of millions of dollars.

According to Bloomberg data, analysts have slashed 2022 revenue estimates for companies in the benchmark Philadelphia Semiconductor Index ($SOX) by 20% since the end of June.  However, the average estimate for Lam Research has only been cut by 11% and has only been cut by 5% for KLA Corp.  More insight about the depth of the downturn could come later today when Lam Research reports its quarterly earnings.

Morgan Stanley said “conditions will worsen” for chip-equipment stocks after Taiwan Semiconductor Manufacturing Co, the world’s largest contract semiconductor manufacturer, announced a 10% reduction to its capital spending last week.  On Monday, Morgan Stanley cut its price targets for Applied Materials, Lam Research, and KLA Corp, noting that conditions are set to worsen for semiconductor equipment makers as capital expenditures at memory and logic chipmakers shrink.

Investors are hoping that the recent slump in the share prices of chip-equipment stocks will insulate the stock from further cuts in earnings estimates.  Shares of Lam Research and Applied Materials have lost half of their value this year.  Meanwhile, KLA Corp is down -37%, and ASML has fallen more than -40%.  The sell-off in the chip-equipment stocks has cheapened their valuations, with most of them selling for 12 times estimated earnings or less.   Mizuho Securities, however, warns that “this is not a normal equity market by any means and additional downside is always possible.”

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