By Nate Wolf

Chip makers are stocking up on equipment that turns hardware parts into functional semiconductors. That is good news for equipment providers such as Applied Materials and Lam Research, according to Morgan Stanley.

The firm upgraded Applied Materials to Overweight from Equal-weight and lifted its price target to $209 from $172 in a research note on Monday. The analysts moved Lam to Equal-weight from Underweight and boosted their price target to $125 from $92.

Both stocks were rising sharply on Monday. Lam climbed 3.1% to $130.85, putting it on pace for an all-time high, according to Dow Jones Market Data. Shares have risen for 14 straight sessions, jumping more than 33% over that period. Shares of Applied Materials were up 4% to $197.84.

The recent turnaround in the memory wafer fab equipment, or WFE, market triggered the revision, Morgan Stanley said. "Memory end markets have turned for the better," the analysts wrote, pointing to rising prices and large orders from hyperscalers.

Analysts at Wedbush Securities and Barclays came to similar conclusions in research notes last week, finding that demand for memory hardware products had spiked unexpectedly.

Capital expenditures on memory equipment may come in higher than expected in 2026 and 2027, Morgan Stanley said, and Lam and Applied Materials are positioned to benefit. The firm expects Lam to outperform the WFE market in 2025 and 2026. Applied Materials, meanwhile, trades at a discount compared with its competitors, meaning its "risk reward is skewed to the upside," the analysts wrote.

Not all stocks in the semiconductor equipment space are poised to reap the rewards, however. Morgan Stanley downgraded KLA to Equal-weight from Overweight in the same note on Monday, though the firm lifted its price target to $1,093 from $928.

KLA, too, should outperform the WFE market in 2025 and 2026, particularly given its outsize exposure to leading-edge logic solutions. But KLA's leadership in this area is already baked into the stock, Morgan Stanley said.

Shares have climbed 69% this year and were up 2.5% to $1070.79 on Monday.

KLA trades at a premium of around 30% compared with Lam and Applied Materials, Morgan Stanley said. "While we do believe that is justified given KLA's gross margin profile and market share gain, we find it hard to see the valuation premium expand any further," the analysts wrote.

Write to Nate Wolf at nate.wolf@barrons.com

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September 22, 2025 13:27 ET (17:27 GMT)

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