On Monday, Citi adjusted its stance on Nova Measuring (NASDAQ:NVMI) Instruments (NASDAQ:NVMI), downgrading the stock from Buy to Neutral and reducing the price target to $224 from the previous $273. The decision is part of Citi's Phase 3 sector stock-picking strategy, which currently favors consumables or wafer starts stocks over those of OEM and component markers.
Nova, recognized for its role in the semiconductor industry, is anticipated to benefit from the growing trend of 3D devices, which is expected to increase metrology capital intensity by 30% in Gate-All-Around (GAA) technologies.
The company's revenue is projected to surpass that of the overall process control sector due to this technology shift. Additionally, Nova is likely to gain from the expanding use of front-end tools in back-end processes, including advanced packaging.
Citi's revision reflects concerns about the potential for Nova's continued outperformance, especially in light of a forecasted dampening in Wafer Fabrication Equipment (WFE) spending in 2025.
Such concerns have prompted a reassessment of the premium valuation that Nova's shares have commanded when compared to its small and mid-size (SMID) semiconductor capital equipment peers.
The new price target of $224 is based on a 31 times price-to-earnings (P/E) ratio, which, while above the three-year average P/E ratio of 24 times, is less than the 38 times P/E ratio previously assigned.
This adjustment takes into account the expected exceptional growth in optical metrology sales and the increasing capital intensity in Process Diagnostic and Control (PDC), albeit moderated by market multiple compression.
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