UBS earnings season outlook: AI spending is strong, supporting Fanlin (LRCX.US) and Texas Instruments (TXN.US), and being cautious about Western Digital (WDC.US)

The Zhitong Finance App learned that Fanlin Group (LRCX.US), Texas Instruments (TXN.US), and Western Digital (WDC.US) will soon release quarterly financial reports in the next few days. UBS believes that in a context where AI spending continues to be high, all three companies are expected to benefit from it.

Fanlin Group: Financial reports are “very strong”, guidance or more impressive

Fanlin will release its financial report on October 21. UBS analysts, led by Timothy Arcuri (Timothy Arcuri), believe that the semiconductor equipment manufacturer will hand over “very strong” earnings reports and that the performance guidance is “even stronger.”

“Importantly, we now believe that semiconductor equipment companies are increasingly adopting an 'advance production' strategy, that is, locking in as much of the production capacity of subsystem suppliers as possible — a dynamic that is expected to bring upward space beyond previous research expectations (previous research showed that wafer factory equipment (WFE) manufacturers have asked subsystem suppliers to prepare for ± 10% month-on-month fluctuations in shipments in the next quarter).”

Analysts further stated that the strong product growth guidelines of applied materials supply chain company UCT confirm that Fanlin's performance will be impressive. They expect Fanlin management to raise the 2026 fab equipment spending forecast to a high range of more than 150 billion US dollars, and make “more optimistic” statements about the outlook for 2027 and even 2028.

UBS believes that the focus of the semiconductor equipment sector in this financial reporting season (similar to the previous quarter) will not be single-quarter figures, but on capacity expansion and profit margin trends. Analysts expect Fanlin “may suggest a third manufacturing site will be added” — the company just announced the construction of a second site last quarter, and several additional laboratories have been added in the past few months. UBS gave Fanlin a “buy” rating, with a target price of 435 US dollars.

Texas Instruments: Performance is expected to hit the upper limit of the guideline, and analog chips may welcome an increase in share

The situation is quite similar for Texas Instruments, which will also release its earnings report on October 21. Analysts expect third-quarter revenue and earnings per share to fall near the upper limit of the guideline range, reaching $6.05 billion and $2.48, respectively.

“Looking ahead to the fourth quarter, we expect TXN to guide revenue down about 4% month-on-month — better than the usual 5-7% seasonal decline — and this is still based on third-quarter revenue or a 10% month-on-month increase.” The analyst wrote, “This will bring the fourth-quarter revenue guide to the range of about 5.8 billion US dollars to 5.9 billion US dollars, which is higher than Wall Street's estimate of about 5.7 billion US dollars. At the same time, although the fundamental layout before the earnings report was quite good, market sentiment about analog chips is still sluggish — the market's expectations for TXN's fourth quarter guidance are only about 200 basis points higher than long-term seasonal levels.”

UBS also pointed out that as buyers are increasingly concerned about supply shortages and Texas Instruments has a strong production capacity layout, the company is expected to seize more share in the analog chip market. UBS gave Texas Instruments a “buy” rating, with a target price of $380.

Western Digital: Order-based production model reduces performance uncertainty, but ratings have been downgraded

Western Digital will release its earnings report on October 22. UBS expects both its performance and guidelines to be better than expected because the company “uses a build-to-order (BTO) model, which basically makes it clear what to ship each quarter a quarter ahead of schedule.”

However, UBS objected to the market view: “Although we don't think there are any recent negative catalysts, it is disturbing that the market is more structurally optimistic about the HDD (hard disk drive) industry but is unconvinced by memory chips.” Analysts said they will continue to resolutely refute this view, believing that there is room for multiple adjustments in the valuation model in response to their predicted downward cycle at the end of 2028/early 2029.

Analysts also mentioned possible changes in the industry landscape: Western Digital, Seagate (STX), and even Toshiba have begun to outsource magnetic heads from TDK — an evolution of the production capacity narrative. Furthermore, Toshiba's efforts to become a more competitive player in the data center HDD market may significantly change the existing narrative of “no additional production capacity and prices will continue to rise.”

Based on the above judgment, UBS maintained Western Digital's “neutral” rating, but lowered the target price from $525 to $470.