2 Stocks Poised to Soar on Memory Chip Boom

As demand for memory chips soar, a number of manufactures of equipment used to make those chips will get a big lift. Both Lam Research Corp. (LRCX) and KLA-Tencor Corp. (KLAC) should outperform on the “raging demand,” which includes demand for both DRAM and NAND flash memory, according to Cowen & Co.’s Krish Sankar. However, not all chipmaking-equipment manufacturers are as well poised to benefit, as Sankar is more cautious about ASML (ASML) and Applied Materials Inc. (AMAT), according to Barron’s.

Sankar assigns Lam a price target of $285 and to KLA, a price target of $140. Over the past year, Lam is up 38%, as of the close of trading on Thursday. KLA is up just over 13% over the same period. Based on the new price targets, Sankar expects Lam to rise by another 40% and KLA by another 24%. (To read more, see: 6 Chips Stocks Ready to Rebound.)

Lam’s Secular Growth

Lam, the dominant supplier of manufacturing equipment for both DRAM and NAND, will benefit from a number of “secular” growth trends that will require increasing amounts of memory content, such as in storage, as well as mobile computing and eventually for automobiles. Despite market saturation from a unit standpoint in mobile computing, DRAM content is growing, which is at least one area where Lam will benefit from its dominance.

While Sankar expects sales for total chipmaking equipment to rise by 6% annually over the next five years, sales for just the tools of memory chips will rise even faster, at a rate of 8%. The tools for which Lam specializes, “deposition” and “etch,” comprise an increasing share of the equipment market, according to Barron’s.

Another secular trend that Lam will benefit from is the increasing cost intensity of making memory chips, as the complexity of manufacturing chips and the number of processing steps required increases.

KLA’s ‘Flash’ Advantage

Sankar is also optimistic about KLA’s ability to take advantage of the long-term growth opportunity in NAND flash, an area where KLA has strong exposure. Adoption of the company’s Gen 5 product is on target and the process control intensity of its 3D NAND product is robust.

In the case of memory-oversupply, which has been a recent concern, KLA has a “buffer,” according to Sankar. Most of the company’s sales are for equipment that produces what are known as logic circuits, such as microprocessors, which may act as a reliable source of sales if the memory market becomes oversaturated with supply. (To read more, see: Why Chip Stocks Are Cheap Amid Pricey Techs.)

Unlike Lam and KLA, ASML and Applied are less likely to benefit from the rising demand for memory chips. Sankar believes that ASML’s shares are too pricey, already reflecting the upside of the company’s extreme-ultraviolet lithographic tools. As for Applied, the side of the business focused on tools for making display glass will suffer from a current weakness in the market for organic light-emitting diode (OLED) displays for smartphones.