Expected 2028 WFE upshift is increasing, but Morgan Stanley remains more constructive on smaller-cap equipment stocks whose earnings leverage in 2027 is still not fully reflected

Overview

This report covers the North American semiconductor capital equipment industry and several equipment companies, with the key change being the rollover of valuation and target-price benchmarks to 2028, along with corresponding upward revisions to 2026-2028 WFE estimates. The report acknowledges that WFE could exceed $250bn in 2028, but says there is currently insufficient confidence to fully embed that scenario into the base model, especially while validating the true contribution from DRAM/NAND capex intensity, EUV supply availability, and logic programs such as TeraFab and Rapidus.

Core views

The central view is that roughly $200bn WFE in 2027 is largely understood by the market, and $250bn in 2028 WFE is beginning to be reflected in share prices; therefore, the valuation-to-upside tradeoff for sector beta is less attractive and stock selection should shift toward firms whose 2027 earnings power is not fully priced. The report prefers Top Pick MKS and OW-rated ONTO, arguing their valuations are less demanding of 2027 earnings upside. KLA and LAM still have structural strengths, but market expectations for above-$250bn 2028 WFE are partially reflected in valuation. AMAT benefits from DRAM and ICAPS, but near-term discount compression is not guaranteed; CAMT benefits from HBM and OSAT spending, though valuation already appears relatively full.

Analysis framework

The report uses a framework combining WFE demand forecasts, end-market demand structure, company market share, gross margin, and forward EPS, and rolls the target-price valuation benchmark from 2027 to 2028. It builds bull/base/bear scenarios for each company and values shares by applying forward P/E multiples to 2028 EPS or adjacent-year EPS, while comparing each company's valuation premium/discount versus U.S. SPE peers such as AMAT, LAM, and KLA.

Methodology notes

• Valuation frameworkForward P/E multiple method

  Uses 2028 EPS or adjacent-year EPS as the valuation anchor and assigns different P/E multiples based on gross margins, market share, quality of growth, and where the company sits in the cycle.

  The report explicitly rolls the U.S. SPE coverage valuation basis to 2028 and notes that equipment company multiples are more margin-driven than simple function of revenue growth.

• Industry outlookWFE scenario analysis

  Assesses company profitability against global wafer fab equipment spending forecasts for 2026, 2027, and 2028.

  The report raised 2026 WFE to $155bn, 2027 to $202bn, and 2028 to $227bn, and discussed the feasibility of a scenario above $250bn.

• Risk-reward analysisBull/base/bear scenarios

  Derives upside and downside cases for each stock under different assumptions for WFE, market share, gross margin, and valuation multiples.

  Individual company pages list price targets, bull targets, bear targets, EPS, revenue growth, gross margins, and key risk drivers.

Asset mapping & comparison

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

• MKS Inc. (MKSI.O)

  Top Pick, benefiting from a recovery in NAND and semiconductor and advanced packaging cycles

  Strengths

  2027 profitability appears underappreciated; semiconductor and E&P business recovery can support revenue, free cash flow, and EPS growth and help deleverage.

  Weaknesses

  The balance sheet shift and packaging focus in the business mix mean valuation trades at a discount versus front-end SPE peers.

  Comparison

  Compared with broad SPE peers, valuation requirements are lower, and 2027 earnings elasticity is not fully priced.

  Risks

  WFE and advanced electronics cycles underperforming, weaker PC/mobile/server demand, and deleveraging slower than expected.

• KLA Corp (KLAC.O)

  OW, benefiting from stronger process-control intensity

  Strengths

  Advanced logic, DRAM, and larger chip dimensions increase process control demand; the company has leading process-control technology and market-share advantages, with higher gross margins.

  Weaknesses

  Valuation commands a premium versus AMAT and Lam and depends heavily on continued WFE outperformance and sustained high gross margins.

  Comparison

  The report views its valuation premium versus U.S. SPE peers as reasonable due to stronger growth outlook and higher margins.

  Risks

  Potential drawdown in advanced logic roadmaps at Intel or Samsung, share loss in mask inspection or e-beam, and China-related restrictions.

• Lam Research Corp (LRCX.O)

  OW, with NAND and logic driving WFE outperformance

  Strengths

  NAND recovery, non-China foundry logic strength, DRAM 4F2 transition, and advanced packaging support long-term growth; shift of manufacturing to Malaysia supports margins.

  Weaknesses

  The market has already priced in part of NAND and logic recovery, and the target multiple was not raised further.

  Comparison

  Trades at some valuation premium versus AMAT, reflecting market-share gains and NAND exposure.

  Risks

  NAND WFE underperforming expectations, expansion of China export restrictions, and market-share loss in etching.

• Applied Materials Inc. (AMAT.O)

  Benefiting from DRAM and ICAPS but with limited enthusiasm

  Strengths

  Higher DRAM exposure, rapid 2026 DRAM WFE growth, and support from ICAPS and advanced logic opportunities.

  Weaknesses

  A valuation discount versus Lam and KLA due to execution risk and concerns around China market-share loss; 2027 growth may only track broad WFE.

  Comparison

  The report raised the target multiple but believes the discount may not narrow in the near term.

  Risks

  Wider China equipment and service restrictions, key customer share loss at Samsung or TSMC, and slower expansion of logic foundry capacity.

• Camtek (CAMT.O)

  HBM beneficiary with relatively full valuation

  Strengths

  Rising back-end metrology and inspection intensity, HBM-driven growth, and OSAT capex support strong double-digit growth in 2026-2027.

  Weaknesses

  Valuation is already above cycle averages; the report keeps a wait-and-see tone pending whether higher-EPS scenarios can be delivered.

  Comparison

  Has a discount to Nova, but remains relatively high versus its own cycle averages.

  Risks

  OSAT capex deceleration, HBM capacity growth below expectations, and share drift to ONTO and KLA.

• Nova Ltd (NVMI.O)

  Target price raised but target multiple reduced

  Strengths

  Metrology and advanced process-related demand still provide long-term support.

  Weaknesses

  The report questions whether NVMI can outperform WFE in 2027, leading to a lower target multiple.

  Comparison

  Even as target multiples were raised for some peers, NVMI and CAMT multiples were cut, signaling lower relative preference.

  Risks

  Growth lagging WFE, intensifying peer competition, and valuation sensitivity to high-growth assumptions.

Key data

• 2026 WFE forecast$155bnRaised from a prior $149bn; approximately +32% year-on-year.
• 2027 WFE forecast$202bnRaised from a prior $191bn; approximately +31% year-on-year. The report notes that roughly $200bn is already well understood by the market.
• 2028 WFE forecast$227bnRaised from a prior $215bn; approximately +13% year-on-year. The report says the $250bn scenario is beginning to be priced but is not yet fully embedded in the model.
• U.S. broad SPE coverage valuation37x CY27; 33x CY2837x CY27 is about a 75% premium to the 21x cycle average since 2020 and above the 30x peak seen in July 2024.
• AMAT target price$647Raised from $502; benefits from DRAM WFE but still faces risk from logic market-share and China-related limitations.
• CAMT target price$167Raised from $163; growth is supported by HBM and OSAT capex, but valuation is already relatively full.
• KLAC target price$274Raised from $190; process control intensity increases from advanced logic and DRAM support a peer premium.
• LRCX target price$404Raised from $331; NAND and logic strength support WFE outperformance, but some upside appears already priced in.
• MKSI target price$442Raised from $374; listed as Top Pick, supported by a recovery in semiconductor and electronic packaging cycles and deleveraging.
• NVMI target price$540Raised from $494; the target multiple was also reduced due to uncertainty around whether NVMI can outperform WFE in 2027.

Impact & implications

For portfolio implications, the macro WFE upgrade in semiconductor equipment does not mean all large-cap equipment stocks still have the same upside. If the market has already priced in $200bn of 2027 WFE and part of the $250bn 2028 outlook, opportunities are more concentrated in companies whose earnings leverage is not yet fully reflected, where valuation support requirements are lower, or where self-improving fundamentals are clearer. MKS, ONTO and peers appear relatively more attractive; KLA and LAM still have structural quality advantages, but valuation sensitivity to optimistic WFE assumptions should be monitored.

Risks

• If the >$250bn 2028 WFE scenario is disproven, equipment names pre-priced for that outcome could face valuation declines.
• Excessive DRAM/NAND WFE could create oversupply and digestion pressure; the report especially watches whether DRAM WFE above $80bn and NAND WFE above $30bn are sustainable.
• EUV supply availability may constrain advanced logic expansion, with concerns around feasibility of approximately 130 tools of demand.
• Whether logic programs such as TeraFab and Rapidus can contribute more than $10bn remains uncertain.
• Broader China export restrictions could hurt shipments and service revenue for AMAT, Lam, KLA and peers.
• Changes in customer share, delays in advanced logic roadmaps, NAND recovery below expectations, or OSAT capex slowing could all pressure company EPS and valuation multiples.

What to watch

• Whether 2028 WFE expectations continue to be revised above $250bn and whether the market prices this in further.
• Whether DRAM and NAND capex leads to bit supply growth above 40% and creates supply-demand risk.
• Whether ASML and EUV tool supply can support advanced logic expansion demand.
• Whether foundry roadmaps at TSMC, Intel, and Samsung move forward or are reduced.
• Lam's market-share changes in NAND and new logic architectures, and whether KLA's process-control intensity continues to rise.
• MKS semiconductor and E&P business recovery, free cash flow improvement, and deleveraging progress.
• CAMT's share performance in HBM and OSAT capex and whether higher-EPS scenarios can be achieved.