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JPMorgan analyst Harlan Sur reiterated an Overweight rating and $158 price target on Applied Materials (NASDAQ:AMAT) and reiterated an Overweight rating and $460 price target on KLA Corporation (NASDAQ:KLAC) on Friday.
The analyst, writing about the semiconductor industry, said wafer equipment spending over the past eight years has outgrown semiconductor industry revenues by approximately 700 bpts per year on rising capital intensity due to increasingly complex manufacturing technologies.
“As these next-gen manufacturing technologies add more layers, more patterning steps, and introduce new materials/device architectures – yield and manufacturability become big challenges for the industry,” he wrote.
Sur explained that the process control segment of the market is becoming increasingly important to drive efficient yield improvement, defect detection during the development of new manufacturing processes, and ensure manufacturing consistency in high volume production.
“Given these challenges, the $10B+ process control market has outgrown the wafer front end (WFE) equipment market over the past two years and KLA (55% share) and AMAT (13% share) dominate this segment and we anticipate process control to continue to outgrow WFE over the next few years,” said Sur.
“We continue to expect KLAC to outperform through cycle on served available market (SAM) expansion, market share gains, and increasing process control intensity that drives KLA’s industry best-in-class financial model (>60% GMs, 40%+ OPMs),” Sur added, stating KLAC is the firm’s top semicap pick.
“We also view AMAT as a beneficiary of the strong growth tailwinds in process control with its growing #2 position and e-beam leadership and reiterate our OW rating on AMAT.”
