Citi bullish on US semiconductor equipment stocks

Investing.com -- Citi upgraded several semiconductor equipment stocks, including Nova, Veeco Instruments Inc (NASDAQ: VECO), MKS Instruments Inc (NASDAQ: MKSI), Advanced Energy Industries Inc (NASDAQ: AEIS), and FormFactor Inc (NASDAQ: FORM) given attractive risk-reward dynamics despite an anticipated 5% decline in wafer fabrication equipment spending in 2025.

The sector has faced a sharp 30% plus correction in the second half of 2024, driven by weaker consumer memory demand and lower spending in China. However, Citi highlighted tailwinds from ongoing AI-related investments and a potential rebound in memory pricing and estimates by the first half of 2025 as key catalysts.

The upgrades align with Citi's "Phase 1 cyclical stock-picking framework" and its US strategy team’s overweight recommendation for semiconductors and semiconductor equipment. The sector currently trades at historically attractive valuations, with discounts of 39% to the Philadelphia Semiconductor Index and 18% to the S&P 500.

For large-cap names, Citi favours KLA over peers Applied Materials (NASDAQ: AMAT) and Lam Research (NASDAQ: LRCX) due to stronger exposure to leading-edge foundry and logic sales and a derisked outlook for China spending.

In the small- and mid-cap space, Citi highlighted Nova for its broad metrology portfolio, Veeco for share gains in laser and annealing markets, and Teradyne (NASDAQ: TER) for opportunities in custom compute.

Citi cautioned that risks remain, including geopolitical tensions, macroeconomic weakness, and overdependence on AI server demand, but believes the sector's correction has largely priced in the negatives.

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