Why UBS Is Now So Against Semiconductor Capex Stocks

With the Nasdaq 100 up over 30% so far in 2019, the Dow Jones industrial average has returned almost 20% and the S&P 500 has returned almost 25% year to date. That’s a solid performance on any year, although it is an exaggerated move if one backs out the losses from the fourth quarter of 2019. That said, this has been a great climate for the rise of many top technology stocks. It’s also a time when investors should start wondering if those great gains have gone a little over the front of their skis.

UBS analyst Timothy Arcuri is worried that the moves in many of the capital spending leaders in the semiconductor sector are way too ahead of themselves. Three major downgrades were seen on Thursday, with the firm going from a cautious stance to a rather negative one that is worse than almost all analyst target prices.

As far as the logic behind the cuts, UBS sees wafer-fab equipment falling to $26 billion or so in 2020 from $35 billion for 2019, seeing a significant correction in capital spending through 2020. Non-memory revenue spending is also back up at levels that have previously represented peak spending trends at a time that memory spending has been benign.

Applied Materials Inc. (NASDAQ: AMAT) was downgraded to Sell from Neutral with a $48 target price (versus a $59.65 prior close). It is still the king of semiconductor capital expenditures, with a $54 billion market cap. Shares closed down 1.8% on Wednesday and were trading down another 3.1% more at $57.90 on Thursday. The consensus analyst target price from Refinitiv was $67.09, and the 52-week trading range is $28.79 to $63.07. Shares had been up 82% so far in 2019 and up 73% from this time last year.

KLA Corp. (NASDAQ: KLAC) was given a double-downgrade, two-notches to Sell from Buy, with a $140 target price (versus a $173.67 close). That non-memory spending is expected to hurt here. The stock closed down 1.3% on Wednesday and was trading down another 4.9% at $165.02 on Thursday. The consensus target price was $190.40,  and the 52-week trading range is $80.65 to $179.95. Shares were last seen up over 90% year to date, and that gain was 88% from this time a year ago.

Lam Research Corp. (NASDAQ: LRCX) was downgraded to Sell from Neutral with a $240 target price (versus a $274.13 close). UBS called it the best positioned of the semiconductor capex stocks, but the firm still sees difficulty in escaping the near-term peaking run rate. The stock closed down 0.95% on Wednesday, and early Thursday it was down another 2% at $268.60. Its consensus target price was $267.09, and its 52-week trading range is $122.64 to $285.87. Lam Research’s performance was up 101% so far in 2019 and up 90% from a year ago.

The VanEck Vectors Semiconductor ETF (NYSEARCA: SMH) was last seen up over 50% year to date, and its shares were down just 0.6% at $131.75 on Thursday morning. That key semiconductor exchange-traded fund has a 52-week range of $80.71 to $135.26. Applied Materials, KLA and Lam Research all have weightings in this fund.

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