3 Chip Stocks Set for an Earnings Boost, and 3 to Avoid

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Chip stocks have been some of the market's stars in recent years. That run is set to continue this earnings season, but some companies are better plays than others, according to Goldman Sachs.

Chipmaking equipment company Applied Materials, semiconductor software provider Cadence Design Systems, and analog semiconductor maker Microchip Technology are all stocks that could surprise investors on the positive side, according to Goldman's James Schneider and colleagues, who have a Buy rating on all three.

Applied Materials shares have already more than doubled this year, which means the company faces a tough task to impress. But Schneider predicts that good news is coming soon.

"We expect Applied to raise its margin targets and provide a robust growth outlook at SEMICON West in October, ahead of earnings-where we expect the company to deliver a strong report," Schneider wrote in a research note Monday.

Cadence, meanwhile, could raise its guidance for this year to around 21% revenue growth from 18% previously as it benefits from a range of custom chip projects. Microchip could project gross margins to recover to about 66% as it benefits from strong data center and aerospace-and-defense sectors, according to the Goldman team.

But chip maker Qualcomm, chipmaking equipment provider KLA Corp., and hard-drive maker Western Digital might be set for disappointment. Schneider and his colleagues have Neutral ratings on all three stocks.

Qualcomm got a boost from the announcement of its chip deal with Amazon.com last month but that has raised the bar perhaps a bit too much.

"We believe investor expectations are likely too high in the short term, as investors focus on quantifying Qualcomm's initial data center revenue contribution...and gaining more insight into any potential smartphone market recovery," Schneider wrote.

KLA's issue, according to Goldman, is that it appears to have already set the goal relatively low by indicating revenue growth in the mid-20% range for 2026 and 2027, despite high industry spending on wafer fabrication equipment. And Western Digital might struggle to match its peer Seagate Technology. Goldman warns that Seagate could gain market share due to a faster ramp-up of Heat-Assisted Magnetic Recording, a technology that increases the amount of data that can be stored on hard-disk drives.

 

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