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Bull of the Day: KLA-Tencor (KLAC)

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KLA-Tencor (KLAC - Free Report) is a $16.5 billion semiconductor equipment manufacturer that became a Zacks #1 Rank Strong Buy in early August after delivering a solid June quarter and outlook for their coming fiscal year 2019, which began in July.
Wall Street analysts raised EPS estimates for the year from $8.86 to $9.28, representing 16% growth. And the top line now sits at $4.45 billion for 10.25% growth.
But shares took a hit recently after the company made subdued comments at the Citi Global Technology Conference last Thursday, September 6. CFO Bren Higgins gave a tempered view of the wafer fabrication equipment (WFE) industry, offering less enthusiasm about an expected December rebound.
At the conference, Higgins said that while the company continues to expect the September quarter as the "trough" for shipments, He was less optimistic for the strength of the snap back he saw for the December quarter in previous statements. 
In his comments, he gave a "modestly weaker" view of his expectations for a rebound. Higgins now expects that shipments could be "flat to down a few single digits or so," versus a prior projection of flat to up by low single digits.
The WWE Battleground of WFE
The KLA-Tencor caution is directly related to the DRAM and NAND memory space, where Micron (MU - Free Report) and Samsung are big buyers of WFE hardware. Stifel Nicolaus analysts commented "We believe this update adds on top of some of the other push outs and capex cuts that have occurred recently and certainly raises concerns that a larger cutback, pause, or extended downturn could be building in the near term."
WFE peers Lam Research (LRCX - Free Report) and Applied Materials (AMAT - Free Report) also fell sharply on September 6 and in the days since as they depend so heavily on the outlooks of giants Micron and Samsung.
And one of the bigger Street bulls in this space, Bank of America/Merrill Lynch, downgraded those two but stayed positive on KLAC on August 28...
Analyst Vivek Arya downgraded Lam Research and Applied Materials, both to Neutral from Buy, after lowering his WFE growth outlook for this year to +7% from +10%. Arya cut his growth estimates for 2019 and 2020, primarily to account for lower memory capital expenditures.
The BofA/ML analyst now expects relative growth in foundry/logic paired with declines in memory within the context of a muted WFE recovery in 2019. He lowered his price target on Applied shares to $49 from $65 and cut his target on Lam shares to $200 from $235.
But Arya maintained a Buy rating on KLA-Tencor as he see it being more defensive as it is levered more to technology transitions than production.
Goldman Chip Analysts Drop the (Final) Hammer
Then today as I write (Wednesday Sep 12), two different semiconductor analysts at Goldman Sachs lowered the boom on both of these industries.
For the memory-maker Micron, Goldman analyst Mark Delaney downgraded the stock to Neutral as he sees weaker fundamentals for DRAM and NAND ahead. Delaney cited memory industry margin pressure into the first half of next year and lowered his price target on the shares to $50 from $68. 
And for the WFE makers that serve Micron, Goldman analyst Toshiya Hari downgraded Lam Research to Neutral and lowered his price target for the shares to $180 from $224. The analyst lowered his coverage view on the semiconductor capital equipment space to Neutral from Attractive as he sees memory capex expectations running into early signs of excess supply.
Hari was initially hopeful this quarter that Samsung's decision to push out DRAM spending was specific to the company and related to node transition issues as opposed to supply/demand issues. But he now envisions a more broad-based correction in memory capex in 2019, as memory manufacturers digest excess capacity.
If the Semi Cycle Isn't Over, the Industry Correction Should Be
The logic of these analysts with deep experience in the chip industry is that it is a very cyclical business. Goldman's Delaney reminds investors that memory downturns usually last for several quarters and can see an acceleration in price declines, as customers delay procurement to wait for lower prices.
But earlier this week, Stifel analyst Patrick Ho and his team reiterated their view that new technologies -- from smartphones, tablets, and the IoT to data centers, autonomous cars/machines and AI -- are driving the semi cycle to last longer.
Following last week’s sharp group sell-off, they affirmed their near-term positive outlook for WFE and their longer-term “cycles are dead” thesis.
Micron CEO Sanjay Mehrotra would agree as he explained during May's Investor/Analyst event that they have evolved beyond the old PC cycles to creating customized memory solutions for their customers in dozens of end markets. And that's why I bought more MU shares on Wednesday ahead of his company's quarterly report next Thursday, September 20.
I detailed the expanded solutions arena for Micron in Artificial Intelligence: Investing in Life 3.0, my August special report for Zacks Confidential. (If you don't have access to ZC -- where you get 52 special reports per year on all industry and investing trends for only $59 -- email today for a trial and tell 'em Cooker sent you!)
Also presenting at Citi's Global Technology Conference last Thursday, Micron's CFO Dave Zinsner said that the company is going to be "more of a product company than we've ever been" and that Micron's DRAM products that go into automotive and IoT end-markets are a focus of the company and do not get a lot of attention from the market.
KLAC Trading 11X in the Tech Super Cycle
And I almost bought some KLAC on Wednesday too, but I'm going to give the bears a few more days to feast and see how this all settles out. I think these bearish "semi cycle top" calls from Goldman and others may finally put a bottom in all these stocks.
Because what we are hearing from Apple (AAPL - Free Report) and NVIDIA (NVDA - Free Report) about technology expansion and demand -- from the consumer to the enterprise -- doesn't fit with the Goldman pessimism.
I'll let Sanjay's outlook next week help me decide whether the call is valid.
Disclosure: I own shares of MU and NVDA for the Zacks TAZR Trader portfolio.
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