Oversold means opportunity! Citigroup is bullish on buying three chip stocks, and Applied Materials (AMAT.US) is under positive catalyst observation.

After experiencing a sharp sell-off in the semiconductor sector, Citigroup has released a research report urging investors to buy three target stocks, believing that the macroeconomic backdrop supporting the industry remains largely unchanged. The report specifically includes Applied Materials (AMAT.US) in its list of positive catalysts to watch. Data shows that the Philadelphia Semiconductor Index has recorded a cumulative increase of about 60% this year, significantly exceeding the S&P 500 Indexs approximately 11% rise during the same period. However, it has retraced by 19% since the beginning of this quarter, while the S&P 500 Index has remained roughly flat. Citigroup analysts pointed out that the prior strong performance of semiconductor stocks had already "overdrawn investors' high expectations," making a pullback inevitable. From a fundamental perspective, Citigroup believes that demand in the industry remains solid. The data center demand, which accounts for about 34% of the overall potential semiconductor market, remains strong, while automotive and industrial demand continues to show signs of recovery. However, consumer demand from PCs and mobile phones remains "weakened due to rising storage costs and supply constraints." Regarding earnings expectations, Citigroup noted that among the companies that have released their second-quarter reports, semiconductor companies have seen average upward revisions of 9% and 6% in consensus earnings per share for 2026 and 2027, respectively, a slowdown from the prior quarter's 15% and 12%. The upward revisions for semiconductor equipment manufacturers remain stable at 10% and 11%. Consequently, the analysts have explicitly stated that they are more optimistic about semiconductor equipment stocks than the overall chip industry because "the upward revisions driven by capital expenditure adjustments have stronger earnings forecast momentum." Based on these judgments, Citigroup recommends buying AMD (AMD.US), Texas Instruments Incorporated (TXN.US), and Applied Materials. Among these, Applied Materials has been placed on the positive catalyst watch list for 90 days, as the company is set to announce its earnings on August 13. Citigroups report anticipates that the guidance for the October quarter will exceed market expectations, with its revenue and earnings per share forecasts being 3% and 2% higher than market consensus, respectively. The bank further pointed out that peers KLA Corporation (KLAC.US), Lam Research Corporation (LRCX.US), and TE Connectivity Ltd. (TEL.US) have all revised their global foundry equipment spending expectations for 2026 to over $150 billion in their latest earnings reports. Looking further ahead, TE Connectivity Ltd. expects foundry equipment spending in 2027 to exceed $190 billion and to reach the $200 billion to $250 billion range from 2027 onward. KLA acknowledges the industry consensus expectation of $190 billion and believes there is upside potential, mentioning unprecedented visibility for the second half of 2027 and even early discussions on demand for 2029 and beyond; Lam Research describes the current demand environment as an "extraordinary setup" for foundry equipment growth in 2027, predicting that favorable trends will continue into 2028. Key drivers include strong AI semiconductor demand, comprehensive expansion of DRAM and logic chips, as well as intensified advanced packaging strength. In the memory chip sector, Citigroup indicated a divergence in operating profit performance among Korean manufacturers due to different exposures in high-bandwidth memory and commodity DRAM. In the second quarter, the average selling price of DRAM rose by over 40% quarter-on-quarter, while the average selling price of NAND increased by about 60% quarter-on-quarter. DRAM manufacturers generally expect supply shortages to worsen in 2027 and to continue into 2028. Samsung (SSNLF.US) plans to allocate 60% to 70% of its production capacity to long-term contract customers, while Micron (MU.US) allocates about 40%. Due to mixed performance results, Citigroup has removed Micron from its catalyst watch list. In the analog chip sector, Citigroup remarked that a widespread recovery is occurring, with industrial demand increasing by approximately 30% to 35% year-on-year, automotive demand rising by 12% to 15%, and consumer electronics growth of 6% to 8%. Companies are raising prices to hedge against input cost inflation, with delivery times lengthening; some products have exceeded 16 weeks, and the urging of customer orders has doubled. Citigroup expects Analog Devices, Inc. (ADI.US), On Semiconductor (ON.US), and Microchip Technology Incorporated (MCHP.US) to exhibit similar trends and reaffirms Texas Instruments Incorporated as its "preferred analog chip stock," primarily due to its manufacturing capacity advantages. Additionally, Citigroup has raised its expectations for capital expenditures among major cloud service providers. Based on second-quarter report data, the bank has revised the capital expenditure growth forecasts for the "Big Five" U.S. cloud service providers to increase by 90% and 46% year-on-year for 2026 and 2027, respectively. Among them, Alphabet (GOOGL.US) has raised its capital expenditure guidance for 2026 to between $195 billion and $205 billion, more than doubling from last year; Amazon.com, Inc. (AMZN.US) has also adjusted its guidance from $200 billion to $220 billion. Citigroup describes this backdrop as "supporting" its positive stance on computing chips and continues to consider AMD as its preferred stock, optimistic about its market share expansion in the GPU and CPU sectors.