The semiconductor industry has gotten a significant boost since the artificial intelligence (AI) era began. AI is heavily reliant on high-powered semiconductor chips, which provide the computational power required to process massive amounts of data and perform complex calculations involved in AI.
While Nvidia (NVDA) is a renowned name in the semiconductor industry, Taiwan Semiconductor Manufacturing Company (TSM), commonly known as TSMC, is a critical player in the global technology supply chain. It is known for producing chips for leading tech companies like Apple (AAPL), Nvidia, Advanced Micro Devices (AMD), and Qualcomm (QCOM).
The AI surge may benefit more than just chipmakers. Even companies related to the industry can benefit from this trend in the long run. Lam Research (LRCX), for example, is a leading supplier of wafer fabrication equipment and services to the semiconductor industry.
Wall Street believes both TSM and LRCX have excellent growth potential, and the consensus forecast calls for double-digit gains from these stocks over the next 12 months.
#1. Lam Research Stock
Lam Research (LRCX) offers cutting-edge wafer fabrication equipment and services, enabling the production of smaller and more efficient devices. Lam's technology is used to manufacture advanced chips.
Valued at $102.5 billion, Lam Research’s stock has gained 1.3% year-to-date, compared to the S&P 500 Index's ($SPX) gain of 20%.
Lam Research has demonstrated a robust financial performance in recent years, benefiting from the high demand for semiconductors across a wide range of industries. For the quarter ended June 30, total revenue increased 2.1% to $3.87 billion, while adjusted earnings per share (EPS) rose by 4.5% to $8.14 per share.
Despite the cyclical nature of the semiconductor industry, Lam Research remains a leader in etch and deposition technologies, which are critical steps in semiconductor manufacturing.
Systems revenue (including sales of new cutting-edge equipment in the deposition, etch, and clean markets), which accounts for 56% of total revenue, grew by 26.8% in the June quarter. Customer support-related revenue and other (customer services and upgrades) revenue accounted for the remaining, which increased by 14% year on year.
Furthermore, Lam Research is a dividend stock with an annualized forward yield of 1.17%, which is slightly lower than the tech sector average of 1.37%. Its forward payout ratio of 25.8% indicates that the company's dividends are sustainable. LRCX has also increased its dividends over the last decade, most recently raising its quarterly dividend by 15%, to $2.30 per share.
Demand for advanced computing, AI, cloud services, electric vehicles (EVs), and the Internet of Things (IoT) is expected to drive continued rapid growth in the global semiconductor industry. Lam Research, a leading supplier of essential manufacturing equipment, is well-positioned to benefit from these trends.
Looking ahead, analysts covering Lam stock expect earnings to rise 18.1% in fiscal year 2025 and 27.4% in fiscal year 2026. Lam appears to be a reasonable buy, trading at 21.6 times forward earnings.
Overall, Wall Street rates LRCX stock a “moderate buy.” Out of the 27 analysts in coverage, 16 have a “strong buy” recommendation, two analysts rate it a “moderate buy,” and nine rate it a “hold.”
The average analyst target price of $1,040.92 for LRCX implies a 31% upside to current levels. Furthermore, its Street-high estimate of $1,325 indicates the stock can rally as much as 66% over the next 12 months.
#2. Taiwan Semiconductor Stock
Taiwan Semiconductor (TSM) is the world's largest and most advanced semiconductor foundry, producing advanced chip nodes such as 3-nanometer (nm) and 5-nm technologies, which are critical for next-generation computing, AI, and mobile applications. TSMC is Nvidia's largest business partner.
Driven by the semiconductor industry’s rapid growth, Taiwan’s stock has surged 73.6% YTD, outperforming the overall market.
In the second quarter, TSMC's total revenue increased by 32.8% year on year to $20.8 billion, thanks to significant contributions from its advanced 5nm and 7nm process nodes, which accounted for 67% of total wafer revenue.
Management anticipates strong smartphone and AI-related demand for its cutting-edge process technologies to boost third-quarter results. Total revenue in Q3 could range from $22.4 billion to $23.2 billion, representing a 32% increase over the year-ago quarter.
Taiwan Semiconductor also pays a dividend, with an annualized forward yield of 1.41%, which is slightly higher than the tech sector average. Its forward payout ratio of 29.8% indicates that the dividends are sustainable for now with room for growth.
The rising demand for advanced chips could result in significant revenue growth in the coming years. Analysts expect TSMC's revenue to increase by 28% in 2024 and 24.2% in 2025. Earnings are also expected to rise by 27.4% and 26.6%, respectively, over the next two fiscal years.
Despite its dominant market position, TSMC's valuation remains relatively attractive when compared to U.S.-based competitors such as Nvidia and AMD. Trading at 26.4x forward 2024 earnings, TSMC is currently reasonably valued. Plus, TSM stock provides a unique opportunity to gain exposure to the industry's most advanced technologies and its ongoing expansion into new markets.
Valued at $906.3 billion, Taiwan Semi stock is very close to joining the $1 trillion market cap club. Overall, Wall Street believes the mega-cap stock is a “strong buy.” Out of the 10 analysts in coverage, eight have a “strong buy” recommendation, one analyst rates it a “moderate buy,” and one rates it a “hold.”
The average analyst target price of $204.71 for TSM implies a 13.2% upside potential. The Street-high estimate of $250 indicates the stock can rally as much as 38.3% over the next 12 months.
