Introduction
The semiconductor industry is the backbone of today’s tech-driven world, powering everything from smartphones to autonomous vehicles. With the current market volatility, savvy investors are on the lookout for strong opportunities to buy high-potential stocks during temporary dips. In this article, we highlight 3 semiconductor stocks that are poised for long-term growth, making them ideal candidates to watch and buy amidst market downturns.
Key Takeaways
- Nvidia’s Influence: Nvidia’s recent forecast has impacted the semiconductor market, presenting buying opportunities amid pullbacks.
- Strong Demand: The long-term demand for semiconductors remains robust, despite expected short-term corrections.
- KLA Corporation: A leader in process control and yield management, with strong dividend growth and revenue performance.
- Applied Materials: The largest semiconductor fabrication equipment supplier, poised for future growth and profitability.
- Lam Research: A key player in wafer fabrication solutions, well-positioned to benefit from global semiconductor demand.
Overview of Current Market Conditions
- Nvidia’s Influence: Nvidia’s performance has significantly impacted semiconductor stocks, sparking a market rally.
- Market Corrections: Following Nvidia’s earnings report, the sector has faced a pullback, creating potential buying opportunities.
- Long-Term Outlook: Analysts remain bullish on semiconductor demand, despite expected short-term corrections in specific segments.
- Caution from Analysts: Citi analysts warn of further corrections in semiconductor equipment demand due to shifting market dynamics.
- Strong Fundamentals: Stocks like KLA Corporation, Applied Materials, and Lam Research are positioned well to weather any cyclical fluctuations.
1. KLA Corporation (KLAC)
Company Profile
KLA Corporation, headquartered in California, is a global leader in process control and yield management systems for the semiconductor and electronics industries. The company specializes in developing advanced inspection and metrology tools, which play a crucial role in the production of integrated circuits.
Performance Highlights
- Market Cap: $103.9 billion.
- Annual Growth: KLAC shares have surged by 67.8% over the past year, outperforming the S&P 500 Index, which gained 29.5%.
- Current Valuation: After a 15% dip from its July highs, KLAC trades at approximately 25 times its forward adjusted earnings, aligning with industry peers.
Dividend Growth
KLA has demonstrated a consistent commitment to returning value to shareholders, increasing dividends over the past 14 years. The company boasts a compound annual growth rate (CAGR) of 14% in dividends over the last five years. Currently, KLAC pays an annual dividend of $5.80, offering a yield of 0.75%.
Fiscal Performance
In its fiscal fourth quarter, KLA exceeded Wall Street’s expectations, reporting revenue of $2.57 billion—a 9% increase year-over-year. Notably, the Defect Inspection segment contributed significantly, generating $1.17 billion in revenue. This robust demand underscores the essential role of KLA’s inspection tools in semiconductor manufacturing.
Analysts forecast KLA’s earnings per share (EPS) to grow 22% to $29.09 this fiscal year, with revenue projected to reach $11.45 billion. With a consensus rating of “moderate buy,” analysts set a mean price target of $863.41, indicating an upside potential of 13.7%.
2. Applied Materials (AMAT)
Company Overview
Founded in 1969, Applied Materials is recognized as the world’s largest supplier of semiconductor fabrication equipment. The company specializes in manufacturing equipment essential for producing integrated circuits (ICs) and chips, crucial components in electronic devices.
Market Position
- Market Cap: $162.8 billion.
- Growth Opportunities: The company is poised to capture over 50% of process equipment spending for transistor manufacturing, with a potential market expansion for transistor modules projected to grow from $6 billion to $7 billion per 100,000 wafer starts.
Stock Performance
Despite impressive gains of over 40% in the past year, AMAT shares have corrected by approximately 24.9% from their July highs around $255. The stock currently trades at a forward adjusted price-to-earnings (P/E) ratio of 23.08, indicating a modest discount relative to the sector median.
Earnings Report
In its fiscal Q3 earnings report, Applied Materials outperformed expectations with net revenue of $6.77 billion, a 5.4% increase year-over-year. Adjusted EPS rose by 11.5% to $2.12, showcasing the company’s ability to navigate challenges in the semiconductor landscape.
Looking ahead, analysts project double-digit growth in earnings and revenue for AMAT in fiscal year 2025. With a consensus rating of “moderate buy” and a mean price target of $234.93, the stock holds a potential upside of 22.3%.
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3. Lam Research Corporation (LRCX)
Company Background
Established in 1980, Lam Research is a prominent player in the semiconductor equipment sector. The company specializes in advanced wafer fabrication solutions, focusing on critical processes such as etching, deposition, and cleaning for integrated circuit production.
Market Performance
- Revenue Contribution: About 42% of Lam’s revenue originates from China, reflecting the growing demand for semiconductors in the region.
- Stock Correction: LRCX has faced a 31.6% correction from its July peak of $1,130, although it maintains a 25% gain over the past year.
Current Valuation
Lam Research is currently trading at 22 times forward adjusted earnings, suggesting the stock is undervalued compared to its peers. Additionally, LRCX has a 10-for-1 stock split scheduled for early October, which may enhance liquidity and attract new investors.
Dividend and Growth
Among the three stocks discussed, Lam pays the highest dividend of $2.30 per share quarterly, translating to an annual yield of 1.17%. The company has a strong history of dividend growth, with a 5-year CAGR of 13.5%.
In its fiscal fourth quarter, Lam delivered impressive growth, achieving net sales of $3.87 billion—a 20.6% increase year-over-year. Analysts expect double-digit EPS growth for LRCX, projecting earnings to reach $44.49 per share by 2026. Wall Street analysts have assigned a consensus rating of “moderate buy,” with a mean price target of $1,036, indicating an expected upside of over 34%.
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Conclusion
The semiconductor sector is currently navigating a complex landscape influenced by market dynamics and shifting demand. However, the long-term outlook remains strong, driven by the essential role of semiconductors in technology advancements, particularly in AI and related fields.
Investors looking to capitalize on recent dips should consider KLA Corporation, Applied Materials, and Lam Research Corporation as strong contenders with robust fundamentals and growth potential. Each of these companies offers unique advantages in the semiconductor industry, positioning them favorably for future success.
