Citi Downgrades Semiconductor Stocks Amid Industry Challenges

Citi gets more defensive on chip stocks, cuts ratings By Investing.com

Citi adopted a more cautious outlook on semiconductor equipment stocks, revealing in a note Monday that it has downgraded two names while highlighting concerns over a "mid-cycle correction" in the first half of 2025. The investment bank now sees weaker consumer demand across PCs, smartphones, and autos, contrasting with the continued strength in server AI demand. "We update our sector view and believe the equipment group is heading into a mid-cycle correction in 1H25," Citi analysts wrote. As a result, they anticipate only modest growth of 5% in wafer fabrication equipment (WFE) for 2025, with memory demand down 8% year-on-year and NAND recovery delayed until the second half of 2025. Citi downgraded MKS Instruments (NASDAQ:MKSI) and Nova Measuring Instruments (NASDAQ:NVMI) from Buy to Neutral, citing worries about the sustainability of growth. In particular, the push out of NAND recovery poses a concern for MKSI, which is "over-indexed to" that market. Analysts also noted that continued weakness in PCs and smartphones further challenges MKSI's prospects. However, Entegris (NASDAQ:ENTG) was upgraded to Buy, with Citi seeing the company as a more defensive play. "We believe Entegris wafer starts driven business is less cyclical than WFE market," the bank stated, noting the company's leading-edge positioning and improved gross margins post-acquisition. Citi also lowered price targets for industry giants Applied Materials (NASDAQ:AMAT), Lam Research (NASDAQ:LRCX), and KLA Corporation (KLAC) by around 10% to $217, $893 and $900, respectively, while maintaining a positive long-term view on these stocks. Analysts prefer KLA over its peers due to its higher exposure to the foundry and logic sectors, which are expected to grow the fastest in 2025. For the sector overall, Citi flagged several downside risks, including macroeconomic weakness, an over-reliance on AI server demand, and geopolitical tensions between China and Taiwan.

Applied Materials, Lam Research, KLA Corp in focus as Citi cuts estimates

Applied Materials and Lam Research were lower in premarket trading, while KLA Corp. was little changed. "While server AI demand remains strong, consumer demand across PCs, smartphones and auto appears lackluster," analyst Atif Malik wrote in an investor note. "We now see modest 2025 [wafer fab equipment] growth of +5% (~$106B) led by a 10% increase in leading-edge logic (mature down Y/Y), memory -8% Y/Y with domestic China DRAM down (international up), and NAND recovery pushed out to [second-half of 2025]." As such, Malik cut his price targets by 10% on the trio, to $217, $893 and $900, respectively. In addition, Malik changed ratings on other semiconductor equipment companies, as he downgraded Nova (NVMI) and MKS Instruments (MKSI) to Neutral from Buy and upgraded Entegris to (ENTG) to Buy. "We downgrade NVMI and MKSI to Neutral from Buy to align with our Phase 3 sector view," Malik wrote. "We continue to view Nova as a key beneficiary of rising metrology capital intensity in [gate all around] and expect top-line growth to outperform process control. That said, we worry about the sustainability of the outperformance and valuation." For MKS Instruments, Malik said the company is "well positioned" to benefit from the rebound in photonics and artificial intelligence-driven design activities, but there is concern about the NAND recovery being pushed out, along with worries over the weakness in PCs and smartphones. Entergis is likely to benefit as its wafer starts driven business is seen as "less cyclical" than the broader wafer fab equipment market and the company appears poised to benefit from leading edge growth in 2025, Malik said.