Applied Materials, other semi-cap stocks cut to Hold at Needham on AI hype
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Needham downgraded several Semi-Cap stocks noting that they have been overbought due to the AI hype.
Needham analysts said that due to enthusiasm for stocks which have exposure to generative AI and LLMs, investors have recently elevated the stock prices of several Semi-Cap companies to new 52-week highs and, in certain cases, all-time highs. After this rally, most Semi-Cap companies, covered by the firm, are trading near or above the analysts' prior price targets.
The analysts' noted that based on an analysis, they do not think that the surge in demand for AI systems will have a meaningful effect on foundry/logic and memory utilization rates or catalyze higher WFE spending in the near-term.
The firm thinks that incremental wafer demand at Taiwan Semiconductor Manufacturing Company (NYSE:TSM) (TSMC) from NVIDIA's (NVDA) demand upside amounts to only a few thousand incremental wafer starts per month over the next year.
In addition, as hyperscale budgets are likely constrained in the near-term due to the challenging macroeconomic scenario, the analysts believe AI servers will eat up compute servers.
The analysts said that with 2026 cyclical peak EPS estimates in hand, they applied a near-median NTM P/E multiple to peak 2026 earnings estimates to reach a cyclical peak price target for each company and then discounted this price back by 18 months to determine reasonable price targets for the companies under their coverage.
After an analysis, they found that Applied Materials (AMAT), KLA (KLAC), Advanced Energy Industries (AEIS), Onto Innovation (ONTO), Nova (NVMI) and Axcelis Technologies (ACLS) may have ~10% or less upside to reach these mid-2024 price targets.
The firm noted that with only ~10% or less upside over the next 1 year, it does not think there is enough reward to justify buying these stocks given the risks which include â 1) P/E multiples contracting over the next 1-2 years from near peak levels; 2) WFE not reaching the firm's forecast of $110B by 2026; and 3) the companies failing to reach their target operating models by 2026.
Thus the analysts noted that they were moving to the sidelines and downgrading Applied Materials (AMAT), KLA (KLAC), Advanced Energy Industries (AEIS), Onto Innovation (ONTO), Nova (NVMI) and Axcelis Technologies (ACLS) to Hold from Buy.
The analysts also removed Axcelis from Needham's Conviction List and maintained its Hold rating on Lam Research (LRCX).
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