Applied Materials Stock Is Tumbling. The Entire Chip Sector Is Sliding Too.

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Chip stocks such as

Applied Materials

and

Nvidia

were falling sharply Tuesday as rising Treasury yields pressured fast-growing tech shares. 

Amid the red ink, New Street Research downgraded Applied Materials (ticker: AMAT) to Neutral from Buy with a $140 price target. The stock was down 6.73% in trading Tuesday to $133.13. The average target price of analysts surveyed by FactSet is $164.15.

New Street said Applied Materials’ valuation vs. the

iShares Semiconductor ETF
(SOXX) “is still very reasonable, but we don’t see a near-term catalyst for a rerating. We maintain our strong positive long-term conviction, but tactically downgrade to Neutral, $140 Target Price.”

The analysts also downgraded

ASML Holding

to Neutral from Buy in a larger call on the semiconductor capital equipment sector, which New Street said was “getting closer to a cycle peak.”

ASML is the world’s largest maker of the equipment required to fabricate the most advanced chips. The extreme ultraviolet lithography, or EUV, machines produced by the company are highly sought after by the

Intel

(INTC),

Taiwan Semiconductor Manufacturing

(TSM), and

Samsung Electronics
.

In the research note, Ferragu said that ASML’s valuation of 44 times forward earnings gave him cause to consider shares. Typically, he wrote, ASML trades at roughly 1.6 times the SOXX ETF’s valuation-by-earnings-multiple compared with 2.4 times above its valuation it trades at now.

But the largest semiconductor companies have committed billions to expanding production amid a shortage of chips. Intel has said it plans to spend $20 billion expanding its factories in Arizona, and Taiwan Semi said it will spend $100 billion over the next several years to expand capacity. Chip manufacturing equipment makers such as ASML typically benefit from significant capital spending.

Other semiconductor leaders such as

Advanced Micro Devices

(AMD) and

Micron Technology

(MU) were declining. Micron reports fiscal fourth-quarter results after Tuesday’s closing bell.

Citi Research analyst Christopher Danely expects Micron to report earnings in line with Wall Street estimates, and that executives will issue guidance below fiscal first-quarter forecasts. Danely predicted in a Monday note that the price of memory, which is one of Micron’s largest businesses, will drop as much as 10% in the next six months, which will hurt the company’s margins.

Graphics and data center chip maker Nvidia received an upgrade from Susquehanna Financial Group analyst Christopher Roland. In a note, Roland bumped his target price to $250 from $220, and said that Nvidia had gained a modest amount of share from rival AMD in the second-hand market.

Higher bond yields have been putting pressure on technology stocks. The tech-heavy

Nasdaq
fell 0.5% on Monday and was down 2% early Tuesday.

Elevated yields, as well as higher interest rates, typically lower the current value of future cash flows, hitting high-growth technology companies that expect significant profit in future years.

—Max A. Cherney contributed to this article.

Write to Joe Woelfel at [email protected]