Jahanara Nissar

After a hiatus of a few months, while we waited for frothiness in AI expectations to calm down (link), we are re-entering the semicap trade on the long side. On a near-term basis we expect LRCX/AMAT management presentations at the upcoming investor conferences to crystallize investor expectations into next year and act a positive catalyst. As a medium term catalyst for semicaps, we look to President Trump’s state visit to China in April 2026, a headline from last week that has gone under-appreciated on the Street.

Our reasons are differentiated vs. the recent upgrades on the Street. Street expectations may have once again gotten a little bit ahead of themselves, this time around, not due to frothy AI expectations but due to rising DRAM/NAND price. We expect DRAM suppliers to hold off on raising WFE just yet. They’d rather enjoy rising prices as long as they can. From a NAND perspective, despite shortage of eSSD supply, we suspect the major NAND players are not quite ready to raise NAND capex vs where it was a quarter ago. We expect Kioxia/SNDK and Hynix/Dalian to be the sole suppliers of eSSD for the foreseeable future. For this reason, we continue to like SNDK (link).

That leaves advanced foundry/packaging. And China. We think the incremental improvement in 2026 WFE comes from these two drivers, for now. We are raising our 2026 WFE estimate to $125bn from our previous $115bn (link). Of the two drivers, increment China WFE, in the range of $5bn-$7bn, may be a bigger needle mover than the Street appreciates. We see potential for pull-in into 1H. Incremental 3nm orders from TSM we think add $3bn-$5bn in additional WFE landing 2026 capex closer to $50bn. Upside to DRAM/NAND WFE to where they were a few months ago would be incremental to our current estimate.

We are raising our price target for LRCX to $175 from $150 on increased estimates. We had already raised AMAT’s PT to $270, going into its earnings two weeks ago, in a note titled “New urgency at TSM” (link). AMAT stock is up nicely since earnings, with more to go. Investors have been a bit unsure of LRCX of late. We expect LRCX to resume its upward trajectory as management provides color into next year.

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A thaw in the US-China relationship? Investors have been giving a lower valuation to China-based semicap earnings due to volatility in US export policy resulting in semicap companies unable to forecast their China business with confidence. Going forward though, investors may wish to keep an open mind. The US trade policy towards China as related to AI semis and semicaps may be changing. Driven by President Trump’s priorities, we suspect there is a thawing in the relationship. If so, such a thawing could be particularly beneficial for semicap names.

The Affiliates rule – an irritant to the relationship: As an outcome of President Trump’s Oct2025 meeting with his Chinese counterpart, the implementation of the Affiliates Rule has only been deferred but not scraped. A permanent scrapping of the Affiliate rule restrictions could be the starting point for a thaw at President Trump’s visit to Beijing. We note that very few proposals for trade restrictions by the US side seems to raise the ire of the Chinese negotiators as much as the Affiliates rule did.

The art of the deal: We suspect the Chinese negotiators care more about restraints in semicap exports vs US restraints in AI exports. Semicap exports are a valuable bargaining chip for the US side for securing in return a reliable supply of Rare Earth minerals from China. We think a ‘deal’ could be – a steady supply of US semiconductor capital equipment to China in return for a steady supply of China’s Rare Earth minerals.

Incremental China WFE: We expect China WFE in 2026 coming in the low to mid-30% range of overall WFE vs. Street expectations of mid-20s%, were the Affiliates rule be scrapped. This adds ~$5bn-$7bn to the overall WFE. We expect a slew of logic foundries to expedite orders into 1H.

Incremental TSM WFE: Going into the AMAT earnings report we called out that TSM had surprised the semicap industry by calling for urgent delivery of of 3nm equipment vs. previous TSM demand forecast of zero 3nm delivery in 2026. Some of this is due to NVDA’s Rubin orders and some due to Apple restarting iPhone17 orders. We estimate this raises TSM WFE by $3bn-$5bn next year, moving overall capex closer to $50bn vs. expectation of mid-$40s billion capex a few months ago.   

How about China fabs on the Entity list? Key fabs such as SMIC, YMTC and CXMT are on the US government’s Entity List. We believe these fabs are doing quite poorly due to lack of spare and services from US-based semicap names – poor yields at the current process node, unable to transition to the next advanced node. As part of a grand bargain, the China side could ask President Trump to scrap Biden-era Entity list restrictions. Although a tiny probability at the moment, as we get closer to the presidential visit next year, the Street may raise the odds, potentially driving up semicap valuation.

Financials and PT: Based on LRCX’s beat and raise quarter and our expectation of a 1CH heavy 2026 we are raising our CY26 earnings estimate to $24bn/$5.75, revenue up 17.5% vs our pre-earnings estimate of $22.9bn/$5.3, revenue up 15%. We model Fy27 at $25.7bn/$6.48, revenue up 15% vs. consensus estimate $23.5bn/$5.6, revenue up 10.6%. At a 27x multiple over our FY27 eps estimate, we derive a price target of $175, up from our previous $150. We are leaving our AMAT estimates and our $270 PT unchanged (link).

Net/Net: After a few months of going sideways, we expect the semicap sector to resume trending upwards as AI investments gain clarity. On top of the AI theme, we expect China WFE gains to be incrementally positive for the stock and likely to gain investor mindshare as President Trump’s state visit to China comes into view. On a near-term basis we expect management presentations at the upcoming investor conferences to crystallize investor expectations into next year and act a positive catalyst.

KC Rajkumar

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