Key Takeaways
- Historical data shows correlation between semiconductor equipment (WFE) and memory stocks ranges only from 0.4 to 0.6
- Between 2021 and 2022, WFE stocks climbed 15.3% as memory stocks declined 34% — creating a 49-point divergence
- The firm expects continued WFE strength through 2028, supported by increasing memory capex including SK Hynix’s KRW 100 trillion fabrication facility investment
- Montage Technology receives Outperform rating with A-share price target increased to CNY 400
- The ESP division at Montage is expected to achieve 76.5% compound annual growth rate between 2025 and 2028
Bernstein analysts are challenging a widespread market belief — that wafer fabrication equipment stocks must track memory semiconductor stocks. Their research suggests otherwise.
In a research note published Monday, analyst David Dai outlined that correlation between leading memory manufacturers and the top five WFE companies measured just 0.4 from 2012 through 2018. While this figure has increased since 2019, it has only reached 0.6.
Meanwhile, WFE stocks have demonstrated a significantly stronger correlation of 0.8 to 0.9 with the comprehensive SOX semiconductor index.
Historical Divergence Reveals Pattern
The research firm highlighted two distinct periods that demonstrate substantial divergence between these sectors.
During the two-year span from January 2015 through December 2016, WFE stocks appreciated 21.9% while memory stocks declined 16.2% — representing a 38.2 percentage point spread. Similarly, between January 2021 and December 2022, WFE advanced 15.3% as memory tumbled 34%, creating a 49-point differential.
Dai suggested investors should consider these as independent positions rather than treating them as correlated investments.
The underlying explanation is structural in nature. WFE expansion is essential for building additional memory manufacturing capacity, and this capacity expansion is what drives memory pricing fluctuations. These sectors connect through cause-and-effect relationships rather than synchronized stock performance.
Bernstein’s Investment Recommendations
Following recent market weakness, Bernstein reaffirmed positive ratings on Samsung, SK Hynix, and Micron. The firm highlighted SK Hynix’s recently disclosed KRW 100 trillion Cheongju fabrication facility investment as confirmation of escalating memory capital expenditure.
Bernstein anticipates potential upward adjustments to both WFE industry forecasts and individual company earnings estimates extending through 2028.
The firm assigned an Underperform rating to Kioxia, citing elevated valuation and anticipated long-term competitive challenges from Chinese semiconductor manufacturers.
Regarding Chinese semiconductor companies, Bernstein identified Montage Technology as its preferred selection within the memory interface chip sector. The company carries an Outperform rating with an elevated A-share price target of CNY 400.
Bernstein increased its 2027 and 2028 earnings per share projections for Montage by 19% and 73% respectively. These upward revisions incorporate improved expectations surrounding the CPU replacement cycle and increased penetration of MRDIMM interface chip technology.
The investment bank also expanded its target valuation multiple for Montage from 44x to 50x, reflecting anticipated expansion in the company’s ESP operations, which are forecast to grow at a 76.5% compound annual rate through 2028.
For Montage’s Hong Kong-listed H shares, Bernstein established a target of HKD 520, representing a 15% premium over the A-share valuation. The firm explained that H shares command a premium because Montage represents an uncommon China-domiciled AI-linked investment opportunity that sidesteps direct geopolitical challenges, 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 reaches 58x at the target valuation.
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