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The semiconductor industry has been a cornerstone of technological advancement for decades, and with the rapid expansion of artificial intelligence (AI), its significance has only magnified. Semiconductors are the backbone of AI technologies, powering everything from data centers to autonomous vehicles, and driving the next wave of digital transformation. As the AI market continues to grow at an unprecedented rate, investors are seeking opportunities to capitalize on this trend by investing in key semiconductor companies poised to benefit from this technological surge.
In this article, we spotlight three semiconductor stocks that are not only highly regarded by analysts, but also present substantial upside potential driven by the AI revolution: Advanced Micro Devices (AMD), KLA Corporation (KLAC), and Lam Research Corporation (LRCX). Notably, Raymond James recently reiterated its “Outperform” rating on this trio of semiconductor companies following a meeting with several industry leaders in Silicon Valley. The investment firm raised its price target on KLA Corp. to $875 from $750, and lifted its target on Lam Research to $1,060 from $950.
Let’s delve into the factors contributing to the positive outlook for these three semiconductor leaders. By examining the strengths and opportunities that AMD, KLAC, and LRCX present, investors can gain a deeper understanding of why these stocks are poised for significant upside in the burgeoning AI market.
1. Advanced Micro Devices
With a market capitalization of $258.5 billion, Advanced Micro Devices (AMD), headquartered in California, specializes in designing and manufacturing microprocessors, graphics processors, and various semiconductor products. Renowned for its innovative strategies, AMD has expanded its product range to cater to diverse markets, including personal computers, data centers, and gaming.
Shares of Advanced Micro Devices have gained 25.4% over the past 52 weeks and 8.3% on a year-to-date basis.
While Nvidia (NVDA), a giant in the industry, holds roughly 80% of the AI chip market, AMD is steadily gaining market share as tech giants increase their AI infrastructure spending to support advanced applications and language models built on the technology. The hardware-related AI market is projected to expand roughly tenfold over the next decade, offering substantial growth opportunities for AMD.
At the Computex technology trade show on June 2 in Taipei, AMD unveiled details about its latest artificial intelligence processors and outlined its plans for developing AI chips in the coming years.
AMD rolled out its next-gen Zen 5 Ryzen processors, featuring the Ryzen AI 300 mobile chips for Copilot+ laptops and the Ryzen 9000 desktop chips for PC builders focused on gaming, creation, and more. Scheduled for launch in July, the Ryzen 9 9950X will feature up to 16 cores and deliver an average of 16% higher IPC compared to Ryzen 7000 CPUs.
Separately, CEO Lisa Su unveiled the MI325X accelerator, which she anticipates the chipmaker will be ready to deliver in the fourth quarter of this year. The company also unveiled its next generation of chips, branded MI350, scheduled for customer release in 2025. These chips are designed with new chip architecture, promising a 35-fold improvement in computing power for generating AI responses compared to its MI300 AI chips, introduced in late 2023.
In addition, the chipmaker introduced its MI400 series set for launch in 2026, specifying that these chips will be built on a new architecture called “Next.”
“AI is clearly our number one priority as a company and we have really harnessed all of the development capability within the company to do that,” Su told reporters at the conference.
These strategic changes by management are anticipated to enhance AMD’s market penetration.
Notably, Raymond James analyst Srini Pajjur noted that according to AMD management, the ramp-up of the MI300 at key customers is “going well,” suggesting a potential to exceed its projected $4 billion in AI revenue for this year. Additionally, the company reaffirmed its outlook that the challenges in the embedded and gaming markets have peaked, anticipating sequential growth in the latter half of the year
AMD released its most recent quarterly earnings report on April 30. In Q1, the company’s revenue rose 2.2% year-over-year to $5.47 billion, surpassing the Wall Street consensus by $20 million. Notably, AMD announced record net revenue of $2.3 billion from its data center segment, marking an 80% year-over-year increase, fueled by strong sales of AMD Instinct GPUs and 4th Gen AMD EPYC CPUs, and saw an 85% year-over-year rise in client net revenue to $1.4 billion, driven by a 58% increase in unit shipments and a 16% rise in average selling price of Ryzen processors, which helped offset revenue declines in gaming and embedded segments. AMD’s first-quarter adjusted EPS has been reported at $0.62, beating the consensus by $0.01.
Looking ahead, management said it expects sales to range between $5.4 billion and $6 billion in the second quarter.
Analysts tracking the company project a 32.64% year-over-year growth in its earnings to $3.51 per share for fiscal 2024, alongside an anticipated 12.69% year-over-year increase in revenue to $25.56 billion.
In terms of valuation, the stock currently boasts a 2024 price-to-earnings multiple of 45.42x, surpassing the sector median of 23.75x, but in line with its own five-year average of 43.15x. Also, the stock currently trades at 10.10 times forward sales, which is markedly higher than both the sector median of 2.86x and its own five-year average of 7.65x. At the same time, AMD has a forward PEG of 1.04, notably below the sector median of 1.99. Overall, while AMD's valuation is not intolerable, it does expose investors to significant risks if the company fails to meet expectations or achieve long-term profitability at the scale anticipated by investors.
AMD stock has a consensus “Strong Buy” rating. Out of the 35 analysts offering recommendations for the stock, 28 recommend a “Strong Buy,” one suggests a “Moderate Buy,” and the remaining six give a “Hold” rating. The mean target price for AMD stock is $193.84, which is 21.4% above Friday's closing price.
2. KLA Corporation
Valued at $111.8 billion, California-based KLA Corporation (KLAC) is an original equipment manufacturer of process diagnostics and control equipment and yield management solutions required for the fabrication of semiconductor integrated circuits or chips.
Shares of KLA Corporation have rallied 71.7% over the past 52 weeks and 41.9% on a year-to-date basis.
KLA holds a dominant position in yield management, a critical phase in chip manufacturing that ensures high-quality wafer production, leveraging its leadership in process control. The company’s tools and expertise empower chipmakers to monitor and enhance their manufacturing processes in real-time, reducing defects and maximizing yield. As the AI and semiconductor industries continue their rapid growth, the wafer inspection market is poised to benefit from increased demand for new process controls, potentially driving higher revenues for KLA Corporation.
On June 5, Barclays analyst Tom O'Malley upgraded KLA Corp. to “Equal Weight” from “Underweight” with a price target of $765, up from $630. The analyst noted that a “robust uptick” in spending in China and aggressive capital expenditure plans in the trailing edge sector in the U.S. counterbalanced some decline in wafer fab equipment, setting the stage for a more favorable environment in 2025 and beyond.
Separately, Raymond James analyst Srini Pajjur noted that KLA Corp. management anticipates China revenue to remain “relatively flat” in the second half of the year and “relatively stable” in 2025. Additionally, they reaffirmed their outlook that advancements in foundry and logic sectors are showing signs of improvement, with data and software contributing to margin enhancements.
“KLAC has a dominant share in infrastructure (wafer houses & mask houses), which appears to be helping as China builds its domestic infrastructure,” Paijur wrote in an investor note. “Longer term management expects China to return to historic levels of mid 20% of sales range but largely due to a recovery in other markets and geographies.”
On May 31, the company paid its shareholders a quarterly dividend of $1.45 per share. Its annualized dividend of $5.80 per share translates to a dividend yield of 0.70%. Also, KLAC holds a solid track record of 14 years of consecutive dividend increases.
KLA Corporation reported its financial results for the third quarter of fiscal 2024 on April 25. Its total revenue declined by 2.9% year-over-year to $2.36 billion in the third quarter, mainly due to reduced product revenues stemming from the broader macroeconomic slowdown affecting semiconductor demand overall. However, KLAC’s top line still exceeded the Wall Street consensus by $40 million. The company’s EPS for the same period stood at $5.26, beating analysts’ projections by $0.20.
Notably, KLA ended the quarter with $4.3 billion in total cash, cash equivalents, and marketable securities, debt of $6.7 billion, and a flexible and attractive bond maturity profile, bolstered by solid investment grade ratings from all three agencies.
The company remains optimistic due to constructive customer discussions regarding their forthcoming investment plans, bolstered by recent indications of a strengthening end-market demand environment and improved customer profitability. On this basis, management believes that revenue bottomed in the March quarter and anticipates growth to resume in the June quarter, with further improvements expected throughout the remainder of calendar year 2024.
For the fourth quarter of fiscal 2024, management expects revenue to be $2.5 billion, plus or minus $125 million, while non-GAAP diluted EPS is expected to be $6.07, plus or minus $0.60.
Analysts tracking KLA Corporation project a decline in the company’s earnings by 8.16% year-over-year to $23.30 per share in fiscal 2024, with an expected improvement of 20.90% year-over-year to $28.17 per share in fiscal 2025. Moreover, Wall Street expects KLAC’s revenue to fall 7% year-over-year to $9.76 billion in fiscal 2024, followed by a projected increase of 14.24% year-over-year to $11.15 billion in fiscal 2025.
In terms of valuation, priced at 35.21 times forward earnings, the stock trades at a substantial premium compared to the sector median of 23.75x and its own five-year average of 19.19x. However, as in AMD’s case, the high multiple can be justified because companies expected to benefit from the AI boom often trade at significant premiums, reflecting heightened investor expectations.
Analysts have a consensus rating of “Moderate Buy” on KLAC stock. Out of the 24 analysts covering KLAC stock, 13 recommend a “Strong Buy,” one suggests a “Moderate Buy,” and 10 advise “Hold.” The stock trades at a premium to its mean price target of $756.90, but the Street-high target price of $890.00 suggests an upside potential of about 8%.
3. Lam Research Corporation
Lam Research Corporation (LRCX), founded in 1980 and based in California, manufactures, markets, and services semiconductor processing equipment used in making integrated circuits, with products designed to deposit special films on silicon wafers and etch away portions of various films to create circuit designs. The company’s market cap currently stands at $135.5 billion.
Shares of Lam Research Corporation have advanced 64.4% over the past 52 weeks, and are up about 32% on a year-to-date basis.
The company’s AI advantage lies in storage. AI applications need fast, high-density storage, and Lam’s technology allows for the production of enterprise solid-state drives that are 50 times faster and up to five times more power efficient than hard disk drives, which currently hold over 80% of enterprise data.
On May 21, LRCX shares gained over 2% on the day after the company announced a 10-for-1 stock split and a $10 billion share buyback, which will “return 75% to 100% of free cash flow to stockholders in the form of dividends and share buybacks.”
On the dividend side, LRCX offers an annualized dividend of $8.00 per share, resulting in a dividend yield of 0.77%. Also, the company showcases 9 consecutive years of dividend growth alongside a 5-year dividend CAGR of 11.92%.
On April 24, Lam Research reported stronger-than-expected financial results for the third quarter of fiscal 2024 and provided a solid outlook for the current quarter ending June 30. In the March 2024 quarter, the company’s revenue fell 2.1% year-over-year to $3.79 billion, yet surpassed the Wall Street consensus by $60 million. At the same time, Lam Research saw a 1% increase in revenue compared to the December 2023 quarter, driven primarily by higher revenue generated in the China region. Notably, the bulk of Lam Research’s revenue came from Asian markets, particularly China, accounting for 42% of the company’s total revenue. Lam also posted quarterly earnings per share of $7.79, surpassing analysts’ consensus of $7.30 per share.
It is also important to note that the company’s gross margin as a percentage of revenue improved to 47.5% in Q3 from 46.8% in Q2. When it comes to the company’s financial position, it held approximately $5.7 billion in cash and equivalents compared to $4.5 billion in long-term debt, reflecting a solid position where interest income exceeds interest expense.
During the last quarter, revenue declined by a modest 2%, a notable improvement compared to previous quarters, indicating a rebound in demand as inventory levels normalize. This performance mirrors that of numerous other companies in the semiconductor sector, which anticipate a pickup in product demand during the second half of 2024 followed by accelerated growth in 2025.
“As our customers address the challenges in scaling semiconductors to meet the power and speed requirements for driving AI transformation, Lam is strengthening its leadership and is well-positioned for the significant opportunities ahead,” said Lam Research CEO Tim Archer.
For the fourth quarter, management expects revenue to be $3.8 billion, plus or minus $300 million, while EPS is forecast to be $7.50 per share, plus or minus $0.75. Analysts tracking Lam Research anticipate a 13.17% year-over-year drop in the company’s earnings to $29.67 per share in fiscal 2024, followed by an expected 18.94% year-over-year improvement to $35.29 per share in fiscal 2025.
Moreover, Wall Street anticipates LRCX’s revenue to decline 14.69% year-over-year to $14.87 billion in fiscal 2024, followed by a projected 18.80% year-over-year increase to $17.66 billion in fiscal 2025.
In terms of valuation, the stock trades at 34.81 times forward earnings, higher than the sector median of 23.66x and its own five-year average of 19.31x. However, the stock trades roughly in line with its peers, KLA Corporation (KLAC) and Applied Materials (AMAT), whose multiples stand at 35.21x and 28.32x, respectively.
Overall, analysts have deemed Lam Research stock a “Moderate Buy.” Out of the 18 analysts covering the stock, 16 suggest a “Strong Buy,” two advise a “Moderate Buy,” and the remaining nine give a “Hold” rating. The stock trades at a premium to its mean price target of $997.76, but the Street-high target price of $1,200 indicates an upside potential of about 16%.
