Semi Sell-Off Offers Opportunity
We see attractive entry points for some wide-moat chipmakers.
A flurry of news items last week sent semiconductor stocks lower, with investors appearing to grow wary as the current upswing gets long in the tooth. Micron Technology (MU) and KLA-Tencor (KLAC) were two of the hardest-hit stocks. Both companies attended the Citi 2018 Global Technology Conference, with management teams providing updates on their prospects. Micron CFO David Zinsner noted that NAND pricing declined in the third quarter, which was to be expected, in our view. KLA-Tencor CFO Bren Higgins reiterated that the September quarter would be the trough for 2018 and added that the December-quarter rebound would be a little smaller than previously expected. We note that delayed capacity expansion plans have been cited by numerous industry participants, including Applied Materials (AMAT) in mid-August.
We believe the market overreacted to the commentary from these CFOs and the sell-off has created appealing opportunities. In wafer fabrication equipment, wide-moat KLA-Tencor and wide-moat Applied Materials are both trading at attractive discounts to our fair value estimates of $128 and $49, respectively. However, no-moat Micron continues to trade at a premium to our $40 fair value estimate, as we do not foresee the current favorable supply/demand dynamics persisting beyond a few more quarters.
Abhinav Davuluri does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.