2 Struggling Chip Equipment Stocks Sink on Downgrades

GlobalFoundries shook up the chip sector with a big announcement today

Managing Editor
Aug 28, 2018 at 10:55 AM
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The semiconductor sector is in the news today, after GlobalFoundries, a prominent chipmaker, announced its intention to stop making next-generation chips. In response to this industry shake-up -- along with a pair of analyst downgrades -- both Applied Materials, Inc. (NASDAQ:AMAT) and Lam Research Corporation (NASDAQ:LRCX) are lower today. 

AMAT Teetering Near Annual Lows

At last check, Applied Materials stock was down 1% to trade at $43.30, dangerously close to yesterday's annual low of $42.52. Today's drop extends the stock's broader decline, and brings its year-to-date deficit to 15.3%. The shares' 320-day moving average turned away a rally three weeks ago, and August is shaping up to be the security's worst month since April 2015. 

Despite the equity's struggles, most analysts remain bullish. Of the 18 brokerages covering AMAT, 14 rate it a "strong buy," with zero "sells" on the books. Furthermore, its average 12-month price target of $62.09 is a 43% premium to its current perch. 

However, that upbeat picture started to shift today, when BofA-Merrill Lynch analyst Vivek Arya downgraded AMAT to "neutral" from "buy." If more brokerage firms follow suit, particularly in the wake of today's GlobalFoundries news, there could be more downside in store for Applied Materials stock.

LRCX Downgrade Could Start a Trend

Lam Research stock also received a downgrade to "neutral" from "buy" at BofA-Merrill Lynch, as well as a price-target cut to $200 from $235. In response, LRCX is down 2.4% to trade at $172, bringing its year-to-date loss to 6.6%.  

The shares seem ripe for more bear notes, as well. Of the 17 brokerages covering LRCX, 16 rate it a "buy" or better, with only one tepid "hold" on the books. In addition, the security's consensus 12-month price target of $239.80 is a 39% premium to its current perch. 

Despite the stock's bearish momentum, it's still an affordable time to pick up put options on LRCX. The equity's 30-day at-the-money implied volatility checks in at 27.6%, which registers in the 10th percentile of its annual range.

Plus, LRCX has consistently rewarded premium buyers over the past year, according to the stock's Schaeffer's Volatility Scorecard (SVS) of 99 (out of 100). This elevated reading indicates the equity has consistently realized greater volatility on the charts over the past year than its options have priced in.

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