UBS Group AG Earnings Season Preview: AI Spending Tailwinds Are Strong, Bullish on Lam Research (LRCX.US) and Texas Instruments Incorporated (TXN.US), Cautious on Western Digital Corporation (WDC.US)

Lam Research (LRCX.US), Texas Instruments Incorporated (TXN.US), and Western Digital Corporation (WDC.US) are all set to report quarterly earnings in the coming days. UBS Group AG believes that all three companies are poised to benefit from persistently elevated AI spending. Lam Research: Earnings "Very Strong," Guidance Could Be Even Brighter Lam Research will report earnings on October 21. UBS analysts led by Timothy Arcuri believe the semiconductor equipment maker will deliver "very strong" results and "even stronger" guidance. "Importantly, we now believe semiconductor equipment companies are increasingly adopting a 'pre-build' strategy locking in as much subsystem supplier capacity as possible a dynamic that could drive upside beyond prior survey expectations (prior surveys showed WFE [wafer fab equipment] makers have asked subsystem suppliers to prepare for quarter-over-quarter shipment fluctuations of 10%)," the analysts wrote in a research note. The analysts further noted that strong product growth guidance from Applied Materials supply chain company UCT corroborates that Lam Research's results will be impressive. They expect Lam Research management to raise its 2026 wafer fab equipment spending forecast to the high end of the range above $150 billion, and to strike an "increasingly optimistic" tone on the outlook for 2027 and even 2028. UBS believes the focus for the semiconductor equipment sector this earnings season (similar to last quarter) will not be on quarterly numbers but on capacity expansion and margin trends. The analysts expect Lam Research "may hint at adding a third manufacturing base" the company just announced a second base last quarter and has added multiple labs over the past few months. UBS rates Lam Research "Buy" with a price target of $435. Texas Instruments Incorporated: Results Could Hit Upper End of Guidance, Analog Chips May See Share Gains Texas Instruments Incorporated, also reporting on October 21, finds itself in a similar situation. Analysts expect Q3 revenue and EPS near the upper end of the guidance range, at $6.05 billion and $2.48, respectively. "Looking to Q4, we expect TXN to guide revenue down about 4% quarter-over-quarter better than the typical 5-7% seasonal decline and this is on top of Q3 revenue growing over 10% quarter-over-quarter," the analysts wrote. "This would put Q4 revenue guidance in the ~$5.8-5.9 billion range, above Wall Street's ~$5.7 billion. Meanwhile, despite a fairly good fundamental setup pre-earnings, sentiment on analog chips remains subdued market expectations for TXN's Q4 guidance are only about 200 basis points above long-term seasonal levels." UBS also noted that with buyers increasingly concerned about supply shortages and Texas Instruments Incorporated's strong capacity footprint, the company is positioned to gain more share in the analog chip market. UBS rates Texas Instruments Incorporated "Buy" with a price target of $380. Western Digital Corporation: Build-to-Order Model Reduces Earnings Uncertainty, but Rating Downgraded Western Digital Corporation will report earnings on October 22. UBS expects both results and guidance to beat expectations, citing the company's "build-to-order (BTO) model, which essentially clarifies what will ship each quarter about a quarter in advance." However, UBS pushed back on the market view: "While we don't see near-term negative catalysts, it's disconcerting that the market holds a more structurally bullish view on the HDD (hard disk drive) industry while dismissing storage chips." The analysts said they will continue to firmly rebut this view, arguing there are multiple adjustment levers in their valuation model for the downturn cycle they forecast for late 2028/early 2029. The analysts also mentioned potential shifts in industry dynamics: Western Digital Corporation, Seagate (STX), and even Toshiba have all begun outsourcing magnetic heads from TDK an evolution of the capacity narrative. Additionally, Toshiba's push to become a more competitive player in the data center HDD market could significantly alter the existing narrative of "no new capacity, prices will keep rising." Based on the above assessment, UBS maintains a "Neutral" rating on Western Digital Corporation but lowers its price target from $525 to $470.