DeepSeek Sell-off Offers Opportunities On Semicaps, Analyst Bumps Up Price Forecasts For KLA, Nova And Camtek

Core Viewpoint - BofA Securities analyst Vivek Arya anticipates fourth-quarter earnings for semiconductor capital equipment, with key reports from ASML Holding, Lam Research Corp, and KLA Corp scheduled for late January [1] Subsector Sentiment - Year-to-date sentiment in the semiconductor capital equipment sector has improved, but complexities arise from potential impacts of DeepSeek's advancements [2] - Risks include reduced AI-related spending if DeepSeek's R1 leads to lower demand for large language models, capital expenditure cuts in memory sectors, and high consensus estimates compared to industry growth expectations [2] Positive Catalysts - If DeepSeek's technology makes inference more cost-effective at the edge, it could trigger a device upgrade cycle in PCs and smartphones, benefiting leading-edge Wafer Fab Equipment [3] - Recent developments include less severe China export restrictions, a positive capex outlook for Taiwan Semiconductor Manufacturing Co, and Intel's capital expenditure plans remaining intact [3] Market Forecasts - Arya maintains a $105 billion Wafer Fab Equipment outlook for calendar 2025, expecting alignment on key issues with upcoming earnings reports [4] - Price targets for KLA Corp, Nova Ltd, and Camtek Ltd have been raised due to favorable data points for leading-edge foundry/logic and HBM spending [4] China Market Insights - The forecast for China’s Wafer Fab Equipment market has been increased to$31.5 billion, reflecting a 15% year-over-year decline, as local semiconductor companies gain market share [5] Growth Estimates - Consensus estimates for the top five semiconductor capital equipment companies project a 10% year-over-year growth for calendar 2025, which is above Arya's forecast of 5% [6] - Excluding ASML, the top semiconductor capital equipment growth is estimated at 8% [6] Stock Performance - Despite the DeepSeek sell-off, semiconductor capital equipment stocks have outperformed the sector year-to-date, with notable gains from Nova Ltd, KLA Corp, Applied Materials, Camtek Ltd, and Lam Research [7] Valuation Insights - Valuations for semiconductor capital equipment companies have been adjusted to reflect anticipated WFE growth, with long-term CAGR projected at 7.5% through 2030-2032 [8] - The sector exhibits superior free cash flow margins compared to the median for S&P 500 industrial companies [8]