2 Chip Equipment Stocks to Buy on the Dip, According to an Analyst

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The stocks of both Applied Materials and ASML have fallen more than 40% this year. Paul Morris/Bloomberg

It has been a terrible year for chip equipment stocks. But based on history, prices in the sector have come down enough to offer attractive buying opportunities, according to New Street Research.

On Friday, analyst Pierre Ferragu raised his ratings for Applied Materials (ticker: AMAT) shares and ASML ( ASML ) stock to Outperform from Neutral, saying the bottom was near for makers of semiconductor-manufacturing equipment. He established target prices of $115 for Applied Materials and €770, equivalent to about $758 as of Friday morning, for ASML.

“We are at a point in time where we feel confident recommending buying the sector,” he wrote.

In early trading Friday, shares of Applied Materials rose 2.7% to $80.81, while the ADRs for ASML rallied by 2.8% to $449.35. Both stocks have fallen by more than 40% this year.

The analyst cited how Lam Research (LCRX) prompted Wall Street to scale back its expectations earlier this week, predicting that industrywide revenue from wafer-fabrication equipment could drop by more than 20% next year. He expects the companies may reduce their financial forecasts one more time, but said the stocks may rally ahead of the final cut.  

“We wouldn’t be surprised to see [valuation] multiples improving from this point in time,” he wrote. “We expect the earnings trough to have materialized by the end of 2023.”

Ferragu is optimistic that the factors that favor the semiconductor industry over the long term, including 5G, artificial intelligence, and high-performance computing, will eventually bring another wave of growth to the industry.

Write to Tae Kim at tae.kim@barrons.com