Evercore ISI analysts recommend taking advantage of the recent downturn in semiconductor equipment (SCE) stocks to invest in high-quality names, citing trade concerns as overblown.
According to Evercore ISI, the near-term probability of implementing stricter Foreign Direct Product Rule (FDPR) restrictions is low.
They view the current weakness in SCE stocks as a unique buying opportunity.
The analysts believe that discussions about more stringent FDPR rules, which aim to limit China’s ability to acquire key chips and chip-making technology from third countries, are primarily efforts to bolster multi-lateral coordination rather than immediate policy changes.
The note highlights that most SCE stocks experienced a decline of 10% to 13% following a Bloomberg article discussing potential FDPR rules on SCE tools sold into China.
Evercore ISI’s policy team considers the challenges of implementing stricter FDPR unilaterally to be significant, thus reducing the likelihood of such measures in the near term.
The report shows that many SCE companies have substantial exposure to China, with ASML (AS:) and Camtek (NASDAQ:) having the highest at 49% and 47%, respectively.
Both companies saw their stocks fall by 11% and 12%. Conversely, FormFactor (FORM) and Teradyne (NASDAQ:), with the least exposure at 9% and 7%, experienced smaller declines of 8% and 7%, respectively.
Evercore ISI advises using this near-term weakness as a buying opportunity for their outperform-rated SCE names, expecting positive EPS revisions with a recovery in leading-edge and memory spending.
Their top large-cap picks include Applied Materials (NASDAQ:), Lam Research (NASDAQ:), KLA Corporation (KLAC), and ASML. For small and mid-cap names, they recommend Onto Innovation (NYSE:), Nova Measuring Instruments (NASDAQ:), and Camtek.
The note specifically mentions that the price action for Onto Innovation, which dropped 13%, may be overdone given its relatively low exposure to China at around 9% in Q1 2024.
Overall, Evercore ISI views the recent sell-off as an opportunity to invest in strong SCE stocks poised for recovery.
