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KLA Shares Plunge on Analyst Downgrade, Samsung Concern

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Recently, KLA-Tencor Corporation’s (KLAC - Free Report) rating has been downgraded by Needham’s analyst Y. Edwin Mok to “hold” from “buy”.

This downgrade comes on the heels of lower customer spending on foundry products and memory pushouts. Moreover, KLA’s customer concentration poses a serious threat to its shipment growth.

Following this announcement, the company’s share price declined 3.4% at market close on Jun 22.

Coming to the price performance over the past 12 months, shares of KLA have returned 10.9%, outperforming the industry’s rally of 30.9%.

Factors in Detail

Per the analyst, the ongoing sluggish trend in customers’ investments on 7 nanometer (NM) and 5 NM foundry products is likely to persist throughout the second half of 2018. This poses a serious threat to the KLA’s shipments.

Further, Samsung, one of the most important customers of KLA, has decided to postpone some of its 10 NM DRAM production and related equipment purchases. Notably, Samsung has accounted for more than 10% of KLA’s total revenues for three consecutive years since fiscal 2015.

This is likely to impact the demand for KLA’s wafer equipments adversely. Its shipments in the third-quarter of calendar year 2018 will be hurt, which will further hinder the company from meeting its shipment expectations.

Further, fall in wafer demand from major customers will hurt the fundamentals and profitability of the company. Consequently, restricted number of customers remains a major issue.

Moreover, this decision of Samsung has resulted in share price declines of Lam Research (LRCX - Free Report) and Applied Materials (AMAT - Free Report) .

Further, the recent trend of transition from 2D NAND to 3D NAND remains negative for wafer demand since the latter requires less wafer and provides higher density.

KLA’s Performance & Positive Outlook

Despite of the cyclicality in consumer investment pattern and major transitions in the semiconductor industry, KLA managed to perform well in the third-quarter fiscal 2018.

KLA reported revenues of $1.02 billion which improved 5% year over year. Product revenues came in $797.8 million, accounting for 78% of revenues. This can primarily be attributed to increased investments from memory and logic customers for next generation technology as well as capacity-related investments.

Additionally, shipments were $1.041 billion, which went beyond the guidance of $945 million to $1.025 billion. Memory, foundry and logic contributed 78%, 13% and 9%, respectively.

Moreover, we remain optimistic about the company’s positive outlook for fourth-quarter fiscal 2018 in which the company expects revenues between $1.02 billion and $1.08 billion, and shipments in the range of $1.01-1.09 billion.

Memory shipments are anticipated in the range of 60-70% of the total shipments, foundry is likely to account for 24% while logic is expected to account for 8% o the shipments. Further, in foundry segment, KLA expects orders for the first wave of investment in 5 NM in the second half of 2018.

Consequently, the positive business outlook, strong fundamentals and continued momentum in China are likely to aid the stock rebound in the upcoming quarters.

Zacks Rank & Stock to Consider

Currently, KLA carries a Zacks Rank #3 (Hold).

A better-ranked stock that can be considered in the broader technology sector is Micron Technology (MU - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Micron Technology is currently pegged at 8.18%.

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