Semiconductor production is rapidly scaling due to the high demand for advanced technologies and innovations in chip design, containing billions of transistors. Factors like a talent shortage, government support through the CHIPS Act, global market access, and increased R&D funding enhance the sector’s growth, making it a promising investment opportunity now.
In this dynamic environment, it could be wise to keep an eye on strong semiconductor equipment stocks. Lam Research Corporation (LRCX) and Applied Materials, Inc. (AMAT) stand out as essential suppliers for the industry.
The semiconductor sector is experiencing strong sales, driven by increasing demand in key industries like consumer electronics, transportation, medical applications, embedded systems, and industrial automation. As these sectors grow, their reliance on advanced chips intensifies. Hence, Statista predicts that the semiconductor market will reach $607.40 billion in revenue this year, with a 10.1% CAGR.
The future of semiconductor demand looks bright, driven by ongoing needs for advanced logic and memory applications, which will enhance production scaling. In 2024, global sales of semiconductor manufacturing equipment are expected to reach $109 billion, a 3.4% increase from 2023. This growth is set to continue into 2025, with projections rising to $128 billion, indicating strong market momentum.
On top of it, investors’ interest in chip stocks is evident from the VanEck Semiconductor ETF’s (SMH) 66.9% returns over the past year. Considering these conducive trends, let’s analyze the fundamental aspects of the two Semiconductor & Wireless Chip picks, beginning with the second choice.
Stock #2: Lam Research Corporation (LRCX)
LRCX designs, manufactures, markets, refurbishes, and services semiconductor processing equipment used in the fabrication of integrated circuits. The company offers ALTUS systems, SABRE electrochemical deposition products, and VECTOR plasma-enhanced CVD products.
On July 31, 2024, LRCX introduced Lam Cryo 3.0, its advanced cryogenic etch technology to accelerate 3D NAND scaling for AI applications. This innovation addresses manufacturing challenges, enabling the production of 1,000-layer 3D NAND with high precision and reduced environmental impact.
In terms of the trailing-12-month EBIT margin, LRCX’s 29.02% is 493.4% higher than the 4.85% industry average. Likewise, its 19.83% trailing-12-month Return on Total Capital is 613.1% higher than the 2.78% industry average. Additionally, its 22.52% trailing-12-month levered FCF margin is 119.5% higher than the 10.26% industry average.
LRCX’s revenue grew at a CAGR of 9.1% over the past five years. Also, its levered FCF grew at a CAGR of 14% over the past three years.
LRCX’s non-GAAP revenue for the fourth quarter, which ended on June 30, 2024, increased 20.7% year-over-year to $3.87 billion, and its adjusted operating income grew 35.6% from the year-ago value to $1.19 billion. For the same quarter, the company’s non-GAAP net income amounted to $1.07 billion, or $8.14 per share, up 32.8% and 36.1% year-over-year, respectively.
Street expects LRCX’s EPS and revenue for the quarter ended September 30, 2024, to increase 17.8% and 16.5% year-over-year to $8.07 and $4.06 billion, respectively. It surpassed the Street EPS and revenue estimates in each of the trailing four quarters. Over the past year, the stock has gained 31.2% to close the last trading session at $822.13.
LRCX’s promising outlook is reflected in its POWR Ratings. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Quality. It is ranked #31 out of 91 stocks in the Semiconductor & Wireless Chip industry. Beyond what we stated above, we also have given LRCX grades for Growth, Value, Momentum, Stability, and Sentiment. Get all the LRCX’s ratings here.
Stock #1: Applied Materials, Inc. (AMAT)
AMAT provides manufacturing equipment, services, and software to the semiconductor, display, and related industries. It operates through three segments: Semiconductor Systems; Applied Global Services, and Display and Adjacent Markets.
In terms of the trailing-12-month EBITDA margin, AMAT’s 30.55% is 205.6% higher than the 10% industry average. Its 16.37% trailing-12-month levered FCF margin is 59.5% higher than the 10.26% industry average. Similarly, its 22.14% trailing-12-month Return on Total Assets is 997.8% higher than the 2.02% industry average.
AMAT’s EPS grew at a CAGR of 15.7% over the past three years. Likewise, its Tang Book Value grew at a CAGR of 20.6% during the same period.
During the third quarter ended July 28, 2024, AMAT’s net revenue increased 5.5% year-over-year to $6.78 billion. The company’s non-GAAP gross profit rose 7.6% year-over-year to $3.21 billion. Furthermore, the company’s non-GAAP net income and EPS came in at $1.77 billion and $2.12, up 10.4% and 11.6% from the prior year’s quarter, respectively.
Analysts expect AMAT’s EPS for the quarter ending October 31, 2024, to increase 3.3% year-over-year to $2.19, and its revenue for the same quarter is expected to rise 3.6% year-over-year to $6.96 billion. It surpassed the consensus EPS and revenue estimates in each of the trailing four quarters. Over the past year, the stock has gained 47% to close the last trading session at $203.50.
AMAT’s bright prospects are reflected in its POWR Ratings. It has a B grade for Quality. Within the Semiconductor & Wireless Chip industry, it is ranked #30. To see AMAT’s Growth, Value, Momentum, Stability, and Sentiment ratings, click here.
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AMAT shares were trading at $203.58 per share on Wednesday afternoon, up $6.38 (+3.24%). Year-to-date, AMAT has gained 26.30%, versus a 20.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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