Morgan Stanley: NAND Recovery Accelerating; Lam Research Upgraded to Overweight, Applied Materials Downgraded to Equal Weight

Overview

Morgan Stanley has released its latest report on the semiconductor equipment sector, significantly raising its 2026 and 2027 global wafer fabrication equipment (WFE) spending forecasts and providing, for the first time, an outlook through 2028. The report’s central thesis is that supply‑demand imbalances in memory chips—particularly NAND—will continue to fuel growth in equipment spending, while competitive pressures in the CPU space will compel Intel to increase its capital expenditures. In light of these dynamics, the firm has revised its ratings on key stocks: upgrading Lam Research (LAM) to “Overweight,” downgrading Applied Materials (AMAT) to “Equal Weight,” and designating MKS Instruments (MKS) as the sector’s “Top Pick.”

Core views

Industry forecasts have been comprehensively revised upward, with NAND emerging as a new growth engine. The report has raised its 2026 WFE market size forecast from $143 billion to $149 billion (up 27% year over year) and its 2027 projection from $182 billion to $191 billion (up 28% year over year), while projecting a further increase to $215 billion in 2028 (up 13% year over year). Among these, the NAND segment has seen the most significant upward revision: NAND WFE is expected to grow by 52% in 2027, reaching $24 billion—surpassing its 2021 peak. This robust outlook is driven primarily by accelerated capital spending on greenfield fab construction by manufacturers such as Samsung and Kioxia, coupled with a reallocation of cleanroom capacity from DRAM to NAND. By contrast, while DRAM is projected to post strong growth in 2026, its expansion rate is expected to moderate in 2027, constrained by tight supplies of EUV lithography tools. Stock rating adjustments: Lam Research benefits from NAND, while Applied Materials faces headwinds from structural shifts. Lam Research’s rating has been upgraded from “Equal Weight” to “Overweight,” with the price target raised from $293 to $331. The rationale is that Lam holds a substantial share of the NAND equipment market—NAND systems are expected to grow by 59% in 2027—and as NAND spending accelerates, its valuation premium relative to Applied Materials should expand from 10% to 20%. Conversely, Applied Materials’ rating has been downgraded from “Overweight” to “Equal Weight,” with the price target unchanged at $502. Although AMAT maintains a sizable exposure to the DRAM segment—accounting for 31% of its revenue in 2026—slower DRAM growth in 2027, combined with concerns about declining market share in China, suggests that its valuation discount will remain wide in the near term. Intel’s capital expenditures and new opportunities in advanced packaging. The report argues that, amid a rebound in CPU demand and potential expansion of its foundry business, increased capital spending by Intel is “inevitable.” Estimates indicate that meeting incremental CPU demand would require at least $23.8–$27.9 billion in WFE investment solely for expanding logic‑wafer production capacity. Meanwhile, the advanced packaging market is projected to grow by 41% in 2026—outpacing overall WFE growth—and with value increasingly shifting toward front-end processes, front-end equipment suppliers such as AMAT, LAM, KLA, and TEL are becoming more attractive than traditional back-end packaging and testing firms. KLA stands to benefit disproportionately, given Intel’s heightened focus on yield management. MKS as the preferred stock: rationale. MKS Inc. has been elevated to “Top Pick,” with a price target of $374. Its semiconductor and electronics‑packaging businesses are poised to expand alongside the NAND cycle recovery, helping the company deleverage and boost earnings per share. While earlier NAND weakness weighed on MKS, as NAND spending outpaces overall WFE growth in 2026–2027, MKS is set to emerge as a key beneficiary.

Analysis framework

Bottom-up disaggregation of sub‑segments and supply‑demand matching analysis. Institutional analysts first construct WFE expenditure models by segment—Logic, DRAM, and NAND—by tracking the capital expenditure plans and capacity‑expansion timelines (Greenfield vs. Brownfield) of major foundries such as Samsung, SK Hynix, TSMC, and Intel. They then assess the duration of the memory cycle by analyzing the gap between “Bit Supply” and “Unconstrained Bit Demand.” For instance, they note that while DRAM demand remains robust, it is constrained by limitations in cleanroom capacity and EUV tool availability, whereas NAND has suffered from supply shortages due to stringent capital discipline in earlier periods, giving rise to strong restocking demand going forward. Finally, by examining each equipment vendor’s revenue mix across different sub‑segments, they estimate its earnings elasticity and conduct relative valuation within historical premium/discount ranges.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-and-Demand Framework

  Analysis of the Gap Between Bit Supply and Unconstrained Demand in the Storage Chip Market

  Research reports assess whether the supply–demand imbalance has been resolved by comparing the actual capacity‑expansion plans for memory chips (supply) with latent market demand (such as unconstrained bit‑growth rates exceeding 40%). When the pace of supply growth lags behind that of demand, it signals firm pricing and sustained capital expenditure—this constitutes the core criterion for gauging the durability of an upward phase in the memory cycle.

• Industry/Industrial Analysis FrameworkVolume-price decomposition

  WFE spending = Fab expansion (Greenfield) + Existing line upgrades (Brownfield/Tech Migration)

  The research report disaggregates equipment spending into incremental demand driven by greenfield plant construction and existing‑node upgrade‑related demand. For instance, it notes that NAND growth is primarily fueled by an acceleration in greenfield capacity additions, whereas DRAM growth, constrained by cleanroom availability at new facilities, relies more heavily on technology node transitions. This breakdown helps to more accurately forecast order visibility across different equipment suppliers.

• Valuation MethodologyPE/PEG valuation

  Relative Valuation Premium/Discount Analysis

  The research report sets the target price by comparing the historical P/E multiples of Lam Research (LAM) and Applied Materials (AMAT). Given expectations that LAM’s market share advantage in the NAND segment will strengthen, the firm has increased its valuation premium over AMAT from 10% to 20%, thereby raising the target price. This approach is a typical example of adjusting relative valuation multiples in response to changes in fundamentals.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Lam Research (LRCX.US)

  Benefit: Accelerated growth in NAND WFE and an increase in market share.

  Strengths

  It holds a dominant position in the NAND device market, with NAND system revenue expected to grow by 59% by 2027; gross margins are expanding as manufacturing shifts to Malaysia.

  Weaknesses

  It has significant exposure to the Chinese market (estimated at 32% in 2026) and faces risks associated with export controls.

  Comparison

  Compared with AMAT, LAM derives a higher share of its revenue from the NAND segment (20% vs. 7%), making it more poised to benefit from the turnaround in the NAND cycle.

  Risks

  China’s export controls have been tightened; the progress of new NAND fabrication plants has fallen short of expectations.

• Applied Materials (AMAT.US)

  Neutral/Damaged: Slowing DRAM growth and concerns over China’s market share

  Strengths

  It has the largest exposure in the DRAM sector (accounting for 31% in 2026) and stands to benefit from the robust growth of DRAM through 2026; it also boasts a compelling value proposition in the front-end packaging segment.

  Weaknesses

  DRAM growth is expected to slow in 2027; the market is concerned about a potential loss of market share in China; its valuation currently trades at a discount relative to LAM and KLA.

  Comparison

  Compared with LAM, AMAT has a smaller exposure to the NAND sector and thus stands to benefit less from the NAND recovery.

  Risks

  China’s export controls on equipment; loss of market share among key customers (Samsung and TSMC).

• MKS Inc. (MKSI.US)

  Benefits: The NAND cycle recovery is driving demand for sub‑components and deleveraging.

  Strengths

  The semiconductor sub‑components business has significant exposure to NAND and will directly benefit from NAND capital expenditure outpacing overall WFE growth; its “optimized interconnect” strategy is driving market share expansion.

  Weaknesses

  The balance sheet still faces deleveraging pressures; the shift in the business mix toward the packaging sector could weigh on valuation multiples.

  Comparison

  As a top-pick stock, its EPS growth driven by the cyclical recovery and its debt-repayment potential have been endorsed by institutional investors.

  Risks

  WFE growth has slowed; NAND manufacturers continue to exercise stringent capital discipline.

• KLA Corp (KLAC.US)

  Benefit: Intel’s improved yield rates and heightened process control rigor

  Strengths

  To achieve high yields and become a viable foundry, Intel has significantly increased its reliance on KLA’s process-control equipment; meanwhile, HBM is driving a surge in the intensity of DRAM process control.

  Comparison

  Revenue from Intel is expected to grow by a factor of 6.4 between 2025 and 2027, making the company an outsized beneficiary of Intel’s increased capital expenditures.

  Risks

  Mask inspection is losing market share to Lasertec, while electron-beam inspection is ceding share to AMAT or ASML.

Key data

• 2026 WFE ForecastUS$149 billionYear-on-year growth of 27%, revised upward from the previous estimate of USD 143 billion.
• 2027 WFE ForecastUS$191 billionYear-on-year growth of 28%, revised upward from the previous estimate of USD 182 billion.
• 2028 WFE ForecastUS$215 billionYear-on-year growth of 13%, with forecasts introduced for the first time.
• 2027 NAND WFE Growth Rate+52%Expected to become the fastest-growing sub-segment.
• Lam Research (LAM) Target PriceUSD 331Raised from $293, implying approximately 16% upside.
• Applied Materials (AMAT) Target PriceUSD 502Rating lowered to Equal Weight, with a valuation of 28x 2027E EPS.
• MKS target priceUSD 374Listed as a Top Pick, with a valuation of 22x 2027E EPS.

Impact & implications

For the semiconductor equipment industry, this suggests that the upcycle may last longer than anticipated, with the recovery in the NAND segment expected to generate substantial incremental orders. From an investor’s perspective, the focus should shift from companies whose growth is heavily reliant on DRAM—where short-term momentum has weakened, as seen in AMAT—to those poised to gain market share in both NAND and advanced logic processes, such as LAM and KLA. Meanwhile, Intel’s rebound in capital expenditures will provide additional upside potential for logic‑equipment suppliers, while the trend toward front-end integration in advanced packaging bodes well for equipment giants with leading‑edge process capabilities.

Risks

• Geopolitical Risks: Further tightening of export restrictions on semiconductor equipment to China could weigh on the China revenues of companies such as LAM and AMAT.
• Inventory Cycle Risk: If NAND or DRAM prices and utilization rates fail to improve as expected, manufacturers may cut capital expenditures.
• Competitive Risks: Equipment vendors may lose market share in emerging technology nodes—such as GAA and backside power delivery—or in specific niche segments, such as mask inspection.
• Intel Execution Risk: Slow progress in Intel’s foundry business could lead to a ballooning cost structure or an inability to capture the anticipated CPU market share.

What to watch

• The progress of new greenfield fabs and the status of equipment order placements among NAND manufacturers (Samsung, Kioxia, and Micron).
• Intel’s capital expenditure guidance and progress in onboarding foundry customers.
• China’s semiconductor equipment import data and policy developments.
• Changes in the revenue mix of advanced packaging front-end processes.