New Chip Design Could Be Huge for Top Capital Equipment Stocks

By Lee Jackson Updated Jun 10, 11:38AM EDT · Published Jun 10, 10:05AM EDT

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Semiconductors have been through a long evolution process that will only continue into the future. Moore’s Law was an observation made by Intel co-founder Gordon Moore in 1965. He noticed that the number of transistors per square inch on integrated circuits had doubled every year since their invention. Moore’s Law predicts that this trend will continue into the foreseeable future. In a new research report, JPMorgan says a new chip design could be big for three top chip capital equipment companies.

New FinFET technology design chips are the breakthrough that could be monumental for the leaders in the field and those producing them. Some believe the FinFET transistor structure promises to rejuvenate the chip industry by rescuing it from the short-channel effects that limit device scalability faced by current planar transistor structure.

The JPMorgan analysts think that with the ability to achieve higher performance designs at lower power, there will be a long string of FinFET-related equipment investments in the coming years. FinFETs are estimated to be up to 37% faster while using less than half the dynamic power or cut static leakage current by as much as 90%. The analysts also think these three Buy-rated companies are poised to benefit.

Applied Materials

This stock is a semiconductor capital equipment leader that has lagged the overall tech market over the past year. Applied Materials Inc. (NASDAQ: AMAT) is actually now trading below all the moving averages, and for patient investors may be a high-quality pick now. The company is the global leader in precision materials engineering solutions for the semiconductor, flat panel display and solar photovoltaic industries. Applied Material’s technologies help make innovations like smartphones, flat screen TVs and solar panels more affordable and accessible to consumers and businesses around the world.

The analysts are very positive on the stock, and they see Applied Materials benefiting not only the semiconductor side of the business, but also from larger, higher resolution and flexible screens on the display side of the business. Many on Wall Street were disappointed when the merger with Tokyo Electron was called off recently, and some think that has contributed to the slide in the stock’s price.

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Despite reporting solid first-quarter earnings that were above consensus, and giving guidance that was in line with expectations, the stock has continued to underperform. It may very well be one of the best technology values available for investors today. The JPMorgan analysts see continued FinFET capacity expansion and transition to 3D NAND, with DRAM spending remaining strong next year.

Applied Materials investors are paid a 2% dividend. The JPMorgan price target for the stock is $28. The Thomson/First Call consensus price target is at $24.50. Applied closed Tuesday at $19.91.
KLA-Tencor

This company is a technology leader in the design, manufacture and marketing of process control and yield management solutions for the semiconductor and related nanoelectronics industries. KLA-Tencor Corp. (NASDAQ: KLAC) industry leading technologies serve the semiconductor, LED and other related nanoelectronics industries. KLA-Tencor has a portfolio of industry-standard products and a team of world-class engineers and scientists.

The company also posted solid results for the first quarter. The analysts feel many of the same fundamentals of 3D NAND and DRAM will benefit orders in the second half of this year and revenue growth for the company should pick up in 2016. KLA also recently announced plans to reduce its workforce by up to 10%, in an effort to streamline operations and to be better aligned with a more concentrated customer base.

KLA-Tencor investors are paid a very solid 3.6% dividend. The JPMorgan price target is set at $76. The consensus target is lower at $65.70. The stock closed Tuesday at $55.65.

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Lam Research

This is the top chip equipment pick at JPMorgan. Lam Research Corp. (NASDAQ: LRCX) designs, manufactures, markets, refurbishes and services semiconductor processing equipment used in the fabrication of integrated circuits. The company offers plasma etch products that remove materials from the wafer to create the features and patterns of a device. Many Wall Street analysts have highlighted the company and its peers as having a significant equipment opportunity from the NAND evolution as well. Lam also appears well positioned to gain share in the wafer fab equipment market, driven by a strong focus on technology inflection spending over the next few years.

The analysts are very positive on the stock because they, like many, feel that Lam’s higher exposure to memory chip customers, which has historically been approximately 56% of the total, could help the company offset any potential near-term foundry order pause. The company posted strong earnings, with revenues and shipments near the high end of guidance and earnings above guidance.

Despite so-so foundry and logic spending, the JPMorgan team thinks that Lam will also continue to benefit from technology transitions such as FinFET, 3D NAND, multi-patterning and advanced packaging in 2015 and beyond.

Lam Research investors are paid a 1.46% dividend. The JPMorgan price target is $95, and the consensus target is right in line at $94.91. The stock closed most recently at $81.98.

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Clearly, new technology will drive spending. These three companies are the undisputed leaders in the industry and their stocks make good sense in an aggressive growth portfolio.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.