Surging demand for semiconductors in everything ranging from kitchen appliances to videogame consoles has created chip shortages around the world. Bernstein analyst Stacy Rasgon said in a note that chip-manufacturing equipment makers are a solid way to play the shortage.
Rasgon initiated coverage of two companies in the Tuesday note: semiconductor equipment makers Applied Materials (ticker: AMAT) and Lam Research (LRXC). Rasgon rated both a Buy.
Rasgon wrote that Applied Materials and Lam have attractive valuations compared with the overall semiconductor sector. He placed a target price of $160 on Applied Materials and $700 for Lam.
The chip sector is difficult to forecast, Rasgon wrote, but the equipment makers have managed to produce strong returns even in a volatile environment. “While not a game for the faint of heart, semicap companies overall tended to do a decent job navigating a virtually unknowable environment,” Rasgon wrote.
Helping too is the size of the chip industry overall, growing to $500 billion, Rasgon wrote. As its overall size has increased, the equipment makers that feed it are better positioned to generate strong returns and have seen higher levels of free cash flow, among other things.
In the longer term, Rasgon wrote that demand for chips will likely keep the overall sector growing nicely. As a result, chip manufacturers will need to continue to increase capital spending to keep pace.
Applied Materials has an analyst day on April 6, too, which could be a catalyst for shares, Rasgon said.
Wall Street has a positive view of Applied Materials, and 85% of analysts have a Buy rating, with 12% rating it a Hold. The average target price is $139.64, which implies an upside of about 5% from current levels.
Lam too is positively viewed by analysts. Of those covering the company, 77% have a Buy and 19% have a Hold. The average target price is $602, which implies a return of less than 1%.
Applied Materials stock rose 5.4% to $133.60 Wednesday, as Lam Research gained4% to $595.25. The PHLX Semiconductor index, or Sox, moved up 2.6%.
Applied Materials shares advanced 191% in the past year, and Lam Research rose 148%. The Sox gained 17% in the same period.
Write to Max A. Cherney at [email protected]
