Chip-equipment companies have benefited from the continuing memory boom, but recent developments in Asia have investors questioning the near-term outlook for companies like Lam Research Corp., KLA-Tencor Corp., and Applied Materials Inc.
Shares of Lam LRCX, -0.83% and its peers in the typically sleepy sector got slammed in early June on word of production delays at Samsung Electronics Co. Ltd. 005930, -0.11% and the stocks have yet to recover. The concern is that Samsung is moving in a slower-than-expected manner with production of some of its chips, which means it’s also delaying equipment purchases.
Wall Street will be paying close attention to the earnings reports and associated commentary from the chip-equipment companies to get a better indication of whether the so-called push-outs at Samsung are indeed viewed to be temporary, and if so, when executives predict that things will get better.
Don’t miss: What will chip makers say about the trade war?
Lam Research reports results on Thursday after the bell, and KLA-Tencor KLAC, -2.80% follows Monday in after-hours time. Applied Materials AMAT, -1.12% is on the docket for Aug. 16. Lam and Applied Materials are both down more than 5% in the past three months, as the S&P 500 index has gained 7.1%.
“We believe a key variable will be the September quarter outlook and perhaps some broad outline of when these memory push-outs may return,” wrote Stifel analyst Patrick Ho, who rates the stock a buy with a $295 price target.
Evercore analyst C.J. Muse also pegged the September outlook and “timing of an inflection” as the key items to watch for in the June-quarter report. He expects that the company will issue an earnings outlook somewhere in the range of $3 to $3.50 per share for the September period, which is significantly lower than the FactSet consensus of $3.87.
Muse is upbeat about Lam’s stock, which he rates at outperform with a $240 price target. “We expect [semiconductor-production equipment] shares to move higher once we have visibility to an inflection higher for shipments — which we believe will occur in 4Q18 or 1Q19,” he wrote last week.
Investors have a few data points to consider when trying to predict what executives from Lam and peers will say about their outlooks. One is the third-quarter forecast from ASML Holding NV ASML, -3.21% which came in ahead of analyst expectations.
“As for laterals, this is the first signal that the current memory pause is short-term in nature,” Muse wrote.
Needham analyst Y. Edwin Mok wrote last week that the comments from ASML were “most positive” for Lam, Axcelis Technologies Inc. ACLS, +0.47% and Applied Materials, while, another data point, the lowered capital-expenditure outlook from Taiwan Semiconductor Manufacturing Co. Ltd. TSM, -0.86% , could be a negative sign for KLA-Tencor.
He rates Lam’s stock a buy with a $230 price target.
See also: With 20%+ earnings growth baked in, the drama for tech this quarter will be in the forecasts
Susquehanna analyst Mehdi Hosseini wrote that ASML isn’t as impacted by certain Samsung push-outs as some of its peers, and it’s also been making progress with extreme ultraviolet lithography, a technology that could make it easier and more cost efficient to produce 7-nanometer chips. These two things make ASML “somewhat immune to shipment volatility that others (i.e., LRCX, AMAT) may be experiencing,” Hosseini wrote.
He has positive ratings on Lam, ASML and Applied Materials, and a neutral rating on KLA-Tencor.
Stifel’s Ho hasn’t heard anything about push-outs at other memory makers, but he’ll be on the lookout for indications.
“Any other memory push outs from different vendors could be a more ominous sign on the environment health versus company-specific drivers (such as fab readiness, yields, etc.) that could impact delays in tool deliveries,” he wrote. Ho said that negative news seems to be “generally factored in” when it comes to the Samsung push-outs.
Another key theme in regards to the chip-equipment earnings will be commentary about trade-war tensions. Analysts at Cowen & Co. recently flagged that Lam’s China exposure was “above the group average” at 15%, based on last year’s sales. KLA-Tencor was at 17% and Applied Material was highest with 21% exposure, they wrote.
See previews of Intel earnings and AMD earnings
CLSA analysts wrote in mid-July that semiconductor-production equipment was among U.S. exports “most impacted by China’s retaliation.”
Shipment data for the current quarter will also be a closely watched metric. The midpoint of Lam’s outlook range was $3 billion, as is the FactSet consensus estimate.
“Our sense is shipments will track somewhere between $2.8 billion to $2.9 billion given the push-outs from Samsung,” wrote Evercore’s Muse, who also said that “all eyes will be on shipments.”
