Citigroup has released a research note urging investors to buy three semiconductor stocks following a sharp selloff in the sector, arguing that the macro backdrop supporting industry growth remains largely intact. The bank has placed Applied Materials (AMAT.US) on a 90-day positive catalyst watch list.
The Philadelphia Semiconductor Index has still gained roughly 60% year-to-date, far outpacing the S&P 500's approximate 11% rise over the same period. However, the index has pulled back 19% this quarter, while the S&P 500 has remained roughly flat. Citigroup analysts noted that the previous strong performance of semiconductor stocks had "priced in high investor expectations," making a correction inevitable.
From a fundamental perspective, Citigroup believes industry demand pillars remain solid. Data center demand, which accounts for about 34% of the total addressable market for semiconductors, remains strong. Automotive and industrial demand continue to recover, while consumer demand from PCs and mobile phones remains "weak due to rising memory costs and constrained supply."
On earnings expectations, Citigroup noted that among companies that have reported second-quarter results, consensus earnings per share estimates for semiconductor firms for 2026 and 2027 have been raised by an average of 9% and 6%, respectively. This marks a slowdown from the 15% and 12% increases seen in the first quarter. For semiconductor equipment makers, the upward revisions have stabilized at 10% and 11%. As a result, analysts explicitly stated they favor semiconductor equipment stocks over the broader chip industry because "upward revisions to earnings forecasts driven by capital expenditure increases are more powerful."
Based on this assessment, Citigroup recommends buying AMD (AMD.US), Texas Instruments (TXN.US), and Applied Materials. Applied Materials has been placed on a 90-day positive catalyst watch ahead of its earnings report on August 13. Citigroup's report forecasts that the company's guidance for the October quarter will exceed market consensus, with its revenue and earnings per share estimates coming in 3% and 2% higher than consensus, respectively.
The bank further noted that peers KLA Corporation (KLAC.US), Lam Research (LRCX.US), and TE Connectivity (TEL.US) have all raised their 2026 global wafer fab equipment spending expectations to above $150 billion in their latest earnings reports. Looking further ahead, TE Connectivity expects wafer fab equipment spending to exceed $190 billion in 2027 and potentially enter the $200 billion to $250 billion range from 2027 onward. KLA agrees with the industry consensus of $190 billion, sees upside potential, and noted unprecedented visibility into the second half of 2027, with early discussions on demand for 2029 and beyond already underway. Lam Research describes the current demand environment as an "extraordinary setup" for wafer fab equipment growth in 2027, with favorable trends expected to continue through 2028, driven by strong AI semiconductor demand, broad expansion in DRAM and logic chips, and increasing advanced packaging intensity.
In the memory chip sector, Citigroup noted that operating profit performance among Korean manufacturers diverged due to their different exposures to high-bandwidth memory and commodity DRAM. In the second quarter, DRAM average selling prices rose over 40% sequentially, while NAND average selling prices increased roughly 60% quarter-over-quarter. DRAM makers generally expect supply shortages to intensify in 2027 and persist beyond 2028. Samsung (SSNLF.US) plans to allocate 60% to 70% of its capacity to long-term contract customers, while Micron (MU.US) allocates roughly 40%. Due to mixed earnings results, Citigroup has removed Micron from its catalyst watch.
For analog chips, Citigroup highlighted a broad recovery underway. Industrial demand has grown approximately 30% to 35% year-over-year, automotive demand is up 12% to 15%, and personal electronics have seen 6% to 8% growth. Companies are raising prices to hedge against input cost inflation, lead times are lengthening, with some products exceeding 16 weeks, and customer expedite requests have doubled. Citigroup expects Analog Devices (ADI.US), ON Semiconductor (ON.US), and Microchip Technology (MCHP.US) to show similar trends. The bank reiterated Texas Instruments as its "top analog pick," citing its manufacturing capacity advantages.
Additionally, Citigroup raised its expectations for capital expenditures from large cloud companies. Based on second-quarter data, the bank increased its growth forecasts for capital spending by the "Big Five" U.S. cloud service providers for 2026 and 2027 to 90% and 46% year-over-year, respectively. Alphabet (GOOGL.US) has raised its 2026 capital expenditure guidance to $195 billion to $205 billion, more than double last year's level. Amazon (AMZN.US) has also revised its guidance upward from $200 billion to $220 billion. Citigroup stated this backdrop "supports" its positive stance on computing chips and continues to list AMD as its top pick, citing its market share expansion in both GPUs and CPUs.