Analysts Revise Semiconductor Outlook
In a recent update, Needham & Company analysts have adjusted their outlook for the semiconductor capital equipment sector. KLA Corp has received an upgrade to a Buy rating, while Onto Innovation (NYSE: ONTO) has been designated as a top pick for the upcoming year.
KLA Corp's Strong Position
The analysts have noted a revision in their projections for wafer fab equipment (WFE) in 2025, adjusting estimates from $110 billion down to $100 billion. This change is attributed to deteriorating industry conditions in areas outside of artificial intelligence (AI) and the consequences of recent U.S. export controls.
They foresee that 2025 will likely represent the peak of the current WFE cycle, anticipating a downturn in the latter half of 2026. Consequently, the analysts have placed four stocks—BESI, COHU, FORM, and ICHR—on Hold, as their valuations are not justified by their current business performance.
KLA Corp's Upgrade Explained
KLA Corp’s upgrade to Buy stems from its proactive measures in response to China-related export controls and its conservative outlook on the WFE market related to China. The analysts remarked, "KLAC is now the one and only semicap company that has a clean slate when it comes to China outlook." This clean slate is primarily attributed to KLA's adaptability in navigating challenges posed by external factors.
Moreover, they emphasized KLA's robust service business growth and ongoing technology enhancements, which they believe will provide stable execution even amidst the current challenging WFE environment.
Onto Innovation: A Top Pick for 2025
In their analysis, Onto Innovation has made its way onto Needham's Conviction List, being labeled as the leading choice for 2025. Analysts underscored the company's substantial exposure to growth driven by AI, particularly in advanced packaging technologies like TSMC CoWoS and HBM.
Additionally, Onto's diminished exposure to the Chinese market is considered beneficial in light of the ongoing decline in WFE activity within that region. The firm is well-positioned to take advantage of the AI growth cycle, leading analysts to expect it will outperform its peers in 2025 and 2026.
Conclusion
Overall, these insights from Needham & Company reflect a cautious yet optimistic view of KLA Corp and Onto Innovation's potential moving forward in the semiconductor space. Investors are encouraged to keep a close watch on these developments as market conditions evolve.
Frequently Asked Questions
What is the current rating for KLA Corp?
KLA Corp has been upgraded to a Buy rating by Needham & Company.
Why was Onto Innovation named a top pick?
Onto Innovation was named a top pick due to its strong exposure to AI-related growth and advancements in packaging technologies.
What impact do export controls have on the semiconductor industry?
Export controls have led to a cautious outlook for certain markets, impacting estimates for wafer fab equipment significantly.
How do analysts view the 2025 WFE cycle?
Analysts believe that 2025 will mark the peak of the WFE cycle, with a downturn anticipated in late 2026.
What companies were downgraded to Hold?
The companies BESI, COHU, FORM, and ICHR were downgraded to Hold due to their high valuations not being supported by business fundamentals.
