Semiconductor equipment parts shortages widen: How much downside does Citi see for the big three?
After the equipment sector pulled back approximately 10% in a week, Citi turned its attention to supply constraints: AI demand remains strong, but parts shortages could limit shipments. Combining 2028 equipment spending scenarios with historical trough valuations, the bank estimates that the big three have approximately 10% and 30% of downside remaining under its base and bearish scenarios, respectively.
Original source：Citi ResearchFirst published on Unhidea：Original source date：
Key takeaway
Citi is concerned that equipment delivery capacity could constrain strong AI demand, while its downside scenarios also depend on assumptions about the scale of equipment spending in 2028 and valuations falling back to historical troughs.
AI demand is strong, so why might equipment growth still be constrained?
The semiconductor equipment sector had already pulled back approximately 10% during the week covered by the report, and investors began paying more attention to downside scenarios. Before SEMICON West, Citi warned that shortages of certain parts could constrain equipment shipments and limit upside to expectations for wafer fabrication equipment spending (WFE) in 2027–2028; the bank now believes the constraints are widening.
Newly constrained areas include gas delivery, DRAM, printed circuit boards and magnet components. The transmission mechanism is that even when customers want to buy, equipment manufacturers may be unable to complete deliveries because of insufficient parts, so demand strength and current shipment growth may diverge.
Citi compares the current cycle with the pandemic period of 2020–2022: underlying demand was strong then, but chip and subsystem shortages still constrained WFE growth. The current cycle is driven by strong AI demand, while supply bottlenecks may again slow the conversion of demand into equipment sales.
How were the approximately 10% and 30% additional declines calculated?
Citi conducted a sensitivity analysis of Applied Materials, KLA and Lam Research: it first set out different 2028 WFE scenarios and then applied the trough price-to-earnings ratios from 2020–2022. On that basis, it estimates that the three companies have approximately 10% of additional downside under the WFE base scenario and approximately 30% under the bearish scenario.
Both declines represent additional downside after the pullback during the week described in the report. The calculation incorporates two variables, operating performance and valuation: equipment spending scenarios affect earnings, while historical trough price-to-earnings ratios determine how much the market pays for those earnings. Thus, the approximately 10% decline in the base scenario also assumes valuations fall to historical troughs.
Why does the downside stress test coexist with high price targets?
Citi’s official price targets remain based on higher valuations of 2028 earnings: 710 dollars for Applied Materials, at a price-to-earnings ratio of 28 times; 290 dollars for KLA, at 38 times; and 435 dollars for Lam Research, at approximately 33 times. All three multiples are above their respective averages over the past three years, of 21 times, 25 times and 25 times.
These valuation premiums depend on a multiyear equipment upcycle and continued AI investment supporting demand. Lam Research is also expected to benefit from a higher share of service revenue, market share gains and rising equipment capital intensity. The report thus presents two sets of assumptions: the official price targets retain the long-term growth thesis, while the downside analysis tests share price resilience when supply constraints and trough valuations act together.
