Bad for ↓
Chip stocks fell to their cheapest valuations since January 2019 on worries about AI spending. That hurts memory makers like Micron, whose earnings investors now doubt. If Micron and its peers slow factory spending, equipment suppliers Lam Research, Applied Materials and KLA lose orders, so the news hurts them too.
Source: MarketWatch ↗
When investors doubt a chipmaker's future profits, orders for factory equipment could slow. That happens even if chips are still selling well.
Chip shares sold off sharply on November 5 after post-election worries about AI spending. Micron fell about 17.5% that day and is down more than 40% from its June record. Investors are split on whether its earnings can hold up after revenue rose 379% in the quarter ended September 3. Memory makers pay for new factories out of their profits. If those profits look less certain, they are likely to slow orders for chipmaking tools. Lam Research (LRCX) sells etch and deposition tools and relies heavily on memory customers, which made up 46% of its systems revenue in the September quarter. Applied Materials (AMAT) and KLA (KLAC) face similar exposure. One early sign: Bloomberg reported on November 5 that Micron had suspended plans for a $4.5 billion memory-chip plant in Taiwan. Micron had said on September 30 that it planned to raise its fiscal 2027 spending above earlier plans, so how much of that changes remains unclear.
Equipment shares fell about as hard as the chipmakers on November 5. Lam Research dropped 16.4%, Applied Materials 13.6% and KLA 13.3%, and all three rose partly on November 6.
The link fails if memory makers keep spending despite the share price drop. The clearest sign would be Micron and other chipmakers holding or raising their factory spending plans in their next quarterly reports. The first big test is Micron's next quarterly report in December, including whether the Taiwan plant suspension reported by Bloomberg is part of a wider pullback. The cloud companies already raised or confirmed their spending in late October, so a cut from any of them would be the clearest sign the link holds.
Equipment makers may come through fine. Valuations fell because prices dropped while earnings forecasts kept rising, so the business may still be strong. Lam Research's revenue grew 54% in the quarter ended September 27, and KLA's grew 29% in the quarter ended September 30. Lam forecast December-quarter revenue of $8.6 billion, plus or minus $400 million, and expects industry equipment spending to top $200 billion in 2027. It said supply shortages, not weak demand, are what is holding back its sales. In 2019, chip stocks rebounded strongly from a similar valuation low.
The last time chip valuations were this low was around January 2019. In that episode, chip stocks bottomed near the turn of 2018 into 2019 and then rebounded strongly during 2019. Equipment makers had cut their forecasts during the memory downturn that came before.
Chip shares fell so hard on November 5 that their prices dropped to the cheapest level compared with expected profits since early 2019. Investors were worried about how much AI spending would continue after the election. Micron, which makes the memory chips AI servers need, was hit hardest.
Micron's revenue jumped about fivefold in the quarter ended September 3, so some investors doubt that boom can last. Chip factories are paid for out of profits a company expects to keep earning. That's why a company that is less sure about next year's profits tends to slow down on building new factories.
Lam Research, Applied Materials and KLA sell the machines inside those factories, so if factory plans are delayed, tool orders can be delayed too. It works like a housing slowdown reaching the lumber yard before anyone notices. Lam leans heavily on memory customers like Micron, which means it could feel any slowdown in memory spending first.
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