Morningstar

Raising Valuations for Applied Materials, KLA, and Lam Research with Higher AI Expectations for WFE

We believe the three companies share an attractive AI growth opportunity in the next five years, but we like Applied the best.

Signage with logo at the Silicon Valley headquarters Applied Materials.
Smith Collection/Gado via Getty
Securities in This Article
Lam Research Corp
(LRCX)
KLA Corp
(KLAC)
Applied Materials Inc
(AMAT)

We have updated our medium-term growth assumptions for the wafer fabrication equipment market, and for Applied Materials AMAT, KLA KLAC, and Lam Research LRCX specifically. Our growth forecasts for these companies also include advanced packaging investments for semiconductors.

Why it matters: We see investments in artificial intelligence infrastructure, particularly AI accelerator chips, driving strong medium-term growth for WFE and advanced packaging. We believe AI demand is driving an increase in the supply of advanced logic and DRAM chips, as well as gains in chip complexity.

  • Advanced packaging typically doesn’t count as part of WFE, but it is an increasingly important opportunity for well-positioned WFE vendors that can do both. We expect this to add to overall growth over the next five years for Applied, KLA, and Lam.
  • We see this group as technology leaders in WFE and advanced packaging that stand to benefit disproportionately from AI chip investments by offering best-of-breed equipment. We expect these companies to outperform smaller peers as they aggregate market share.

The bottom line: We have raised our fair value estimates for these wide-moat WFE vendors: to $200 per share from $196 for Applied Materials, to $800 from $750 for KLA, and to $100 from $96 for Lam. After recent appreciation, we view Applied as fairly valued, while KLA and Lam look overvalued.

  • We’ve seen strong appreciation for the group with improved sentiment for Intel after investments by the US government and Nvidia. We think this is neutral for WFE companies, with our long-term WFE forecast more tied to global chip demand than short-term share shifts among TSMC, Intel, and Samsung.
  • We believe the three companies share an attractive AI growth opportunity in the next five years, but we like Applied the best of this group. Applied’s shares have underperformed those of KLA and Lam, which we see as an actionable disconnect for long-term investors.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Sponsor Center