Preview of the earnings season for the U.S. AI industry chain, this investment bank warns: Beware of "good news fully priced in," hold tight to "NVIDIA, Broadcom, and AMD"

Author: Dong Jing

Source: Hard AI

Barclays released its latest research report on the eve of the third quarter earnings season for U.S. semiconductors, making significant adjustments to its investment strategy in the AI industry chain. While maintaining the judgment that the AI investment cycle is still in its early stages, the bank warned that some stocks have fully reflected all the benefits of AI deployment and suggested that investors concentrate their AI exposure on the three leaders: NVIDIA, Broadcom, and AMD, while downgrading the ratings of Marvell, Astera Labs, and Lumentum to neutral.

On October 21, according to Hard AI, Barclays analyst Tom O'Malley's team pointed out in the latest research report that although AI-related stocks are expected to achieve strong performance exceeding expectations and raise guidance in the upcoming earnings season, the market is expected to experience a "buy the rumor, sell the news" sell-off, as the current valuation threshold is already very high. Since the third quarter, the Philadelphia Semiconductor Index has significantly outperformed the S&P 500 Index by about 15%, and the gains in the AI and storage/memory sectors have far exceeded those in other sub-sectors.

This is also the core logic behind the bank's downgrade of Marvell, Astera Labs, and Lumentum, as after a significant rise, the risk-reward ratio of some AI concept stocks is no longer attractive. At the same time, the bank upgraded KLA's rating to overweight, believing that its dominant position in the process control market and high exposure to advanced processes will benefit from the AI computing power investment wave.

In the simulation chip sector, Barclays maintained a low allocation rating for Texas Instruments, pointing out that the recovery in the industrial and automotive markets remains weak, while consensus expectations are still significantly above the long-term compound annual growth rate trend line, posing further downgrade risks. The bank believes that the industry may face a structural contraction of the total addressable market (TAM), rather than simple cyclical fluctuations.

Selectively Tightening AI Exposure: Downgrading Three Popular Stocks

Barclays stated in the report that the core logic behind this rating adjustment is that after a significant rise, the risk-reward ratio of some AI concept stocks is no longer attractive.

Marvell downgraded to neutral: ASIC and optical shares face challenges. Barclays downgraded Marvell from overweight to neutral, maintaining a target price of $80.

The bank pointed out that Marvell's goal of achieving $7 billion in revenue from its data center business in the 2026 calendar year faces risks, mainly from two pressures: first, ASIC business growth is below expectations, and second, it faces share erosion from Broadcom in the 1.6T optical market.

In terms of ASIC business, Barclays learned through discussions with AlChip that the total opportunity size for the Amazon Trainium 3 project is about $6 billion, and after deducting HBM, Marvell can target a market of about $3 billion.

Even assuming Marvell captures a 60% share, based on a product lifecycle of five quarters, the contribution for the 2026 calendar year would only be about $1.35 billion, far below market expectations More importantly, the bank believes that Marvell's actual market share may be far below 60%, and there is a lack of clear ASIC project reserves after Trainium 3.

In terms of optical business, although the 800G upgrade cycle will drive revenue growth of 21% to approximately $3.8 billion in 2026, Barclays' research at the European Conference on Optical Communication (ECOC) shows that Broadcom is gaining a share advantage in the 1.6T market.

Industry insiders point out that Marvell's 3nm DSP chips have power consumption issues, with about a 1-watt disadvantage compared to Broadcom products, which will affect their competitiveness in next-generation products.

Astera Labs downgraded to Neutral: The ecosystem is shifting to Ethernet. Barclays has downgraded Astera Labs from Overweight to Neutral, maintaining a target price of $155.

The bank believes that Astera is undergoing a significant product transformation, with its retiming business at launch being replaced by revenue from Amazon's Scorpio switches, but there is a lack of clear growth path after Trainium 3.

The key risk is that the industry ecosystem is moving away from Astera's core technology. Barclays points out that aside from NVIDIA's NVLink, the market is shifting from UAL (Universal Chip Interconnect) to Ethernet, particularly the Broadcom-dominated ESUN (Ethernet Scalable Interconnect Network) protocol.

This protocol has received support from major manufacturers such as AMD, Cisco, NVIDIA, Microsoft, Meta, and OpenAI, while UAL will not be in production until 2027, and Astera's UAL switches are not yet ready.

For the Trainium 3 project, the market's expectation of $1 billion in revenue for Astera's X series switches may be overly optimistic.

Barclays estimates that considering the typically low switch ratio for custom chips (possibly below 50%) and an ASP of about $13 per channel, the actual contribution of this project to Astera may be close to $500 million rather than $1 billion.

Additionally, there are signs that Broadcom's fourth customer may be Anthropic, which means Amazon may reduce its investment in the Trainium project to some extent.

Lumentum downgraded to Neutral: Upside potential has been fully reflected. Barclays has downgraded Lumentum from Overweight to Neutral, maintaining a target price of $165.

Lumentum's stock price has risen nearly 60% over the past three months, while the S&P 500 index has only increased by about 5% during the same period, and Barclays believes that the short-term upside potential has been fully priced in.

Although Lumentum is expected to reach its $600 million quarterly revenue target a quarter early, the bank points out that its upside potential is relatively limited compared to peers in terms of EML (Electro-Absorptive Modulated Laser) capacity expansion and growth in optical transceiver customers.

As Broadcom and Lumentum expand their own capacities, the supply tightness of EML will ease, which is beneficial for Coherent, which requires laser sales modules, but may lead to pricing pressure for Lumentum

Upgrading KLA to Overweight: A Long-Term Winner in Process Control

In contrast to downgrading three stocks, Barclays has upgraded KLA from Neutral to Overweight, significantly raising the target price from $750 to $1,200, based on a 31 times price-to-earnings ratio for an earnings per share of $38.75 for the calendar year 2026.

Continuous Improvement in Process Control Intensity. Barclays believes that as the complexity of technology naturally increases, the intensity of process control will continue to rise. This includes factors such as larger chip sizes brought by HBM, the need for more process control sampling per layer of HBM, wafer-level packaging, hybrid bonding, more design starts, and variants.

KLA's management pointed out that the intensity of process control in the wafer fab and logic chip sectors has reached the mid-high single-digit percentage, while in the DRAM sector, it has grown from mid-high single digits to nearly 10%.

Highest Exposure to Advanced Processes. Among the three major semiconductor equipment companies (Applied Materials, KLA, and Lam Research), KLA has the highest exposure to advanced processes.

According to Barclays' Wafer Fab Equipment (WFE) model, the bank recently raised its forecast for advanced process spending growth in 2026 from flat to an increase of 8%, primarily driven by capital expenditure growth from TSMC and Samsung offsetting declines from Intel. Growth in 2027 is expected to accelerate to 15%, as some AI infrastructure builds will materialize.

Lowest Growth Threshold for 2026. Barclays' calculations show that after excluding the impact of external uncertainties, the revenue growth rates for Applied Materials, KLA, and Lam Research for the calendar year 2026 are 15%, 10%, and 12%, respectively. Considering KLA's lower exposure to external business (about 10-15% hardware impact), its threshold for achieving core business growth is the lowest among the three companies.

HBM Demand Estimation: Micron's Long-Term Bullish Logic

Barclays has conducted a detailed HBM demand estimation based on announced AI computing power projects, building a stronger long-term growth outlook for Micron and raising the target price from $195 to $240.

Demand Estimation Method. Barclays used the 60.5 gigawatts of power data from its AI computing power tracker, divided by the approximately 120 kilowatts of power consumption per NVL72 rack, to derive a potential demand of about 500,000 racks.

By calculating the specifications of NVIDIA's GPUs from GB200 to Rubin Ultra, it was determined that the weighted average requirement is about 100,000 GB of HBM memory per rack. Multiplying these two figures gives a total demand of approximately 50.7 billion GB (50.7 EB) of HBM memory.

Market Size Projection. Barclays estimates that the total DRAM revenue of the three major memory manufacturers (Micron, Samsung, SK Hynix) will be $127.4 billion in 2025, with HBM revenue accounting for about $35.8 billion, or 28.1%.

Calculating at the current HBM price of about $12.87 per GB, the HBM shipment volume in 2025 is expected to be about 2.8 billion GB. Future rack construction demand (50.7 billion GB) is approximately 18 times the current market size, corresponding to a total HBM revenue of about $652.4 billion.

Micron's Share Opportunity. Based on a 5-year construction cycle, the average annual HBM market size is about $130.5 billion. With Micron's current market share of 19.2%, its potential annual HBM revenue could reach $25.1 billion, far exceeding the expected $6.8 billion in 2025 Barclays' scenario analysis shows that even in a downside scenario where HBM prices drop by 20% and market share remains unchanged, Micron's HBM business scale will still be about three times its current size.

The bank emphasized that this calculation does not take into account Micron's potential market share gains, as the company is gaining share in key end markets such as HBM and enterprise-grade SSDs.

Analog Chips: Beware of Structural Contraction in TAM

Barclays holds a cautious view on the analog chip sector, believing that the industry may face not only cyclical adjustments but also structural contraction in the overall addressable market.

Macroeconomic data diverges from expectations. Although the PMI rose above 49 for the first time since June in September, it remains in the contraction zone (49.1). Compared to the last update, the consensus for industrial revenue has been significantly downgraded, while the consensus for semiconductor analog chips has remained largely unchanged.

More concerning is the expectation for the second half of 2026, which shows a decline in industrial revenue while semiconductor revenue remains flat, indicating a clear divergence between the two.

Doubts about the trend line for valuation regression. Currently, the consensus revenue expectations for all analog chip companies are at or below the lower end of the long-term compound annual growth rate (CAGR) range, which traditionally should lead to mean reversion.

However, Barclays questions the validity of these long-term CAGRs themselves, arguing that the pre-pandemic GDP+ growth model was the "normal" state, rather than the double-digit growth "new normal" during the pandemic.

Automotive and industrial sectors remain under pressure. Texas Instruments pointed out that the recovery time for the automotive market is extended, while Barclays' automotive team expects global light vehicle production to decline in low single digits in 2026, contrasting sharply with the semiconductor industry's consensus of an 11% growth in automotive chips.

In the industrial sector, although some companies are seeing signs of a bottom, macroeconomic data does not support a structural upward trend, and the anticipated timing for interest rate cuts is far beyond expectations.

Texas Instruments faces downside risks. Barclays maintains an underweight rating on Texas Instruments, expecting downside risks for its revenue and profit margins in the December quarter.

The bank's model shows revenue/earnings per share of $4.31 billion/$1.25, below the market expectation of $4.51 billion/$1.39; gross margin is 56.3% (cash gross margin 68.4%), below the market expectation of 57.2%.

RF Chips: Moderate Outperformance Under Conservative Guidance

Barclays updated its mobile model, adjusting product mix assumptions based on recent industry commentary and teardown data, maintaining a relatively positive view on the RF chip sector.

The bank raised its 2025 industry total shipment expectations by 5% and new model shipment expectations by 4%. Considering data related to iPhone Air, it lowered the assumed share of this model in new models from 30% to about 10%, aligning more closely with RF manufacturers' comments.

In terms of content, the latest teardown shows that the iPhone 17 Air is missing a power amplifier chip from Cirrus Logic, while expectations for new chips in the iPhone 18 have been removed due to a lack of visibility.

For Qorvo, Barclays gives more content growth credit (+5%) to external model discrete devices, bringing it closer to management's guidance of over 10% intergenerational growth, but the blended content growth remains only 5% Barclays believes that the mobile sector has underperformed this quarter (up about 5% vs SOX index up 23%), and earnings that exceed expectations will be welcomed by the market.

Among the three companies, Cirrus Logic may perform the best in the short term due to its high exposure to Apple (over 80% of revenue) and recent strong numbers, but there are long-term downside risks as it removed the $1 content assumption for 2026 (revised down from $7.68 to $6.44).

Barclays' earnings per share forecast for 2026 is: Qorvo $6.96 (previously $6.42), Skyworks $4.91 (previously $4.82), reflecting a better shipment environment