As the chip sector continues to experience a significant rally, analysts on Wall Street are starting to question whether the gains are truly justified. KeyBanc Capital Markets analyst Steve Barger has recently downgraded his rating for chip-equipment maker KLA Corp. (KLAC) from Overweight to Sector Weight, citing concerns about valuation. Additionally, Barger has removed his previous stock price target for the company.
Barger noted, “We don’t see evidence of a rapid return to industry demand exceeding supply, but we think shares may be discounting a return to those record run-rate levels. We don’t see a compelling risk/reward scenario for KLA shares.”
KLA Corp. has not yet responded to requests for comment regarding the KeyBanc report. As of Friday, the stock is trading around $461. Over the past 12 months, KLA shares have seen a 46% increase, outpacing the 39% gain of the iShares Semiconductor exchange-traded fund that tracks the ICE Semiconductor Index.
The ICE Semiconductor Index: Powering Artificial Intelligence Applications
The ICE Semiconductor index is a broad-based sector index that encompasses not only chip equipment makers like KLA, but also leading chip manufacturers such as Nvidia (NVDA) and Broadcom (AVGO). These companies have experienced significant growth due to the increasing demand for chips that drive artificial intelligence applications.
Previously, investors were primarily concerned about a decline in chip demand for traditional markets such as computers, smartphones, and data centers. However, the buzz surrounding AI has overshadowed those worries.
While the overall chip sector may experience a recovery in the future, KeyBanc analyst Mark Barger believes that any potential upturn has already been factored into KLA’s stock price given its recent performance. Barger expresses discomfort with the current share price and questions whether the industry can deliver the anticipated turnaround.
“We don’t foresee any fundamental catalyst or valuation support in the near term that would prompt us to raise our price target,” he stated.
This downgrade by Barger follows Needham analyst Quinn Bolton’s decision to downgrade both Applied Materials (AMAT) and KLA last month due to exaggerated stock rallies.
Original article by Tae Kim