Key Takeaways
- Historical data shows semiconductor equipment (WFE) and memory stocks correlation ranges only 0.4 to 0.6, far weaker than commonly believed
- During 2021ā2022, WFE stocks climbed 15.3% while memory declined 34% ā a divergence of 49 percentage points
- Bernstein maintains bullish WFE outlook to 2028, highlighting SK Hynix’s KRW 100 trillion fabrication facility commitment
- Montage Technology receives Outperform rating with A-share price target elevated to CNY 400
- Montage’s ESP division expected to achieve 76.5% CAGR between 2025 and 2028
Bernstein is challenging a widespread market belief ā that equipment manufacturers for semiconductors must track memory chip producers in performance. The firm’s analysis suggests this assumption doesn’t hold up under scrutiny.
In a research note released Monday, analyst David Dai highlighted that between 2012 and 2018, leading memory manufacturers and the five largest wafer fabrication equipment (WFE) companies showed only a 0.4 correlation. While this figure has improved since 2019, it remains modest at 0.6.
Meanwhile, WFE manufacturers have demonstrated a significantly stronger 0.8 to 0.9 correlation with the broader SOX semiconductor benchmark.
Historical Divergences Reveal Independent Paths
The research firm identified two distinct periods demonstrating substantial performance gaps between these sectors.
During the January 2015 through December 2016 timeframe, WFE manufacturers surged 21.9% while memory producers declined 16.2% ā creating a 38.2 percentage point spread. The 2021-2022 period proved even more dramatic, with WFE advancing 15.3% against a 34% memory sector decline, resulting in a 49 percentage point differential.
Dai emphasized that investors would benefit from viewing these as independent investment opportunities rather than assuming synchronized movement.
The underlying explanation is structural in nature. Equipment manufacturers enable new memory production capacity, and this capacity expansion ultimately drives memory pricing dynamics. While causally connected, their share price movements remain distinct.
Firm’s Current Investment Recommendations
Bernstein reaffirmed positive outlooks on Samsung, SK Hynix, and Micron despite recent market weakness. The firm referenced SK Hynix’s freshly unveiled KRW 100 trillion Cheongju facility investment as validation of expanding memory capital expenditure.
Bernstein anticipates potential upward adjustments to both WFE market projections and individual company earnings forecasts extending through 2028.
The firm assigned an Underperform rating to Kioxia, citing valuation issues and sustained competitive threats from Chinese semiconductor manufacturers.
Regarding Chinese equities, Bernstein identified Montage Technology as its preferred selection within the memory interface chip sector. The company carries an Outperform rating with an upgraded A-share price objective of CNY 400.
Bernstein increased its 2027 and 2028 earnings per share projections for Montage by 19% and 73% respectively. These revisions incorporate enhanced expectations surrounding CPU replacement cycles and accelerating MRDIMM interface chip penetration.
The firm also expanded its target valuation multiple for Montage from 44x to 50x, attributable to expansion in the company’s ESP division, forecast to grow at a 76.5% compound annual rate from 2025 through 2028.
For Montage’s Hong Kong-listed H shares, Bernstein established a HKD 520 target, representing a 15% premium over the A-share objective. The firm explained that H shares command a premium because Montage represents a scarce China-domiciled AI-exposed investment opportunity that sidesteps direct geopolitical complications, unlike competitors subject to export restrictions or entity list designations.
Bernstein observed that H share liquidity remains constrained due to lock-up provisions and anticipates the premium will persist near-term. The implied forward price-to-earnings ratio on H shares stands at 58x at the target valuation.
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