Chip-equipment stocks haven't performed well lately as investor concerns about the hot pace of artificial-intelligence spending have spooked the market. It could be just the beginning of a steeper drop for these stocks, Citi says.
Shares of Lam Research, Applied Materials, and KLA have all suffered recently.
These companies, which make wafer fabrication equipment that turns raw silicon wafers into microchips, are big beneficiaries of the AI spending boom. Their wafer fabrication equipment is used to manufacture the advanced chips needed to power data centers and AI systems.
However, as sentiment around the AI trade has grown more negative due to concerns around debt and the massive spending needed for data-center buildout, so too has the sentiment around these stocks.
"Investors have increasingly focused on potential downside scenarios," Citi analyst Atif Malik said in a research note late Thursday.
Lam Research stock fell more than 17% last week and has declined nearly 13% this week as of Thursday's close. The company's fiscal-first-quarter earnings on Wednesday narrowly surpassed Wall Street estimates, but ran up against lofty investor expectations for artificial-intelligence-related companies.
Shares of Applied Materials, similarly, sank more than 19% last week and entered Friday's trading session down 8.2% this week. KLA stock has fallen 11% this week after tumbling 15% last week.
The sharp share price declines have brought all three stocks below their 50-day and 200-day moving averages.
Malik says there's more downside potential for the three companies' shares based on analysis of the 2028 wafer fabrication equipment market.
Under the firm's base case scenario for 2028, which includes constraints to the wafer fabrication equipment market, Advanced Materials stock has a $335 price target, KLA has a $130 price target, and Lam Research stock has a $208 price target. Those targets represent about 10% downside for each stock from Thursday's closing price.
The firm has bear case price targets of $259 for Advanced Materials, $105 for KLA, and $164 for Lam Research. Those would imply drops of about 30% from Thursday's closing levels.
This is due to the close correlation between chip-equipment demand and the share price for the companies. Any change in the demand outlook for data centers could drastically change the business outlooks for the companies, according to Malik.
The firm also says that while demand from AI data centers is currently robust, supply shortages could constrain market growth in coming years.
Citi has Buy ratings on all three stocks. Malik has current price targets of $435 on Lam Research, $290 on KLA, and $375 on Applied Materials.
Lam Research stock rose 0.6% to $231.84 on Friday after slumping 12% Thursday. Applied Materials stock gained 1.3% to $380.35 on Friday while KLA advanced 0.4% to $148.33.
With all three stocks below key technical levels and seemingly searching for a bottom, investors may be right to take a pessimistic view.
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