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Semiconductor stocks have helped fuel the market rally, led by Nvidia (NVDA), since specialized chips are an essential piece of architecture needed to support the artificial intelligence (AI) boom. However, after Nvidia's forecast for slower - but still robust - revenue growth in its late August earnings report, semiconductor stocks faltered as a group amid growth concerns.
But, just as Fed Chairman Jerome Powell characterized the central bank's 50-basis point rate cut as a “recalibration” of policy, rather than a reaction to a softening economy, the recent pullback in chips could simply present an opportunity to buy stocks at a more reasonable price - rather than signaling the start of a serious fundamental weakening in the market.
The long-term outlook for semiconductors remains strong, with industry data showing strong demand. That said, analysts at Citi caution that the semiconductor equipment sector may see further corrections in the first half of 2025 due to changing market dynamics affecting demand in key segments such as PCs, smartphones, and autos.
Despite these headwinds, the firm notes that semiconductor stocks KLA Corporation (KLAC), Applied Materials (AMAT), and Lam Research Corporation (LRCX) should hold up well in this environment. All three stocks have pulled back from their highs, and offer relatively higher exposure to the foundry and logic corners of the market - which, according to Citi, leaves them well-positioned to ride out any cyclical choppiness in the industry.
#1. KLA Corporation
Based in California, KLA Corporation (KLAC) is a leading provider of process control and yield management systems for the chip-making and electronics industries worldwide. The company develops advanced inspection and metrology tools used in the production of integrated circuits, helping manufacturers improve quality and efficiency their chip fabrication processes.
Valued at $103.9 billion, shares of the semiconductor firm have rallied 67.8% over the past year, outpacing the broader S&P 500 Index's ($SPX) gain of 29.5%.
However, KLAC has pulled back about 15% from its July highs, which means it's still possible to buy the dip in this outperforming stock. Shares of KLAC trade at around 25 times forward adjusted earnings, which is in line with its sector peers. This suggests that KLAC is reasonably valued at current levels.
Over the last 14 years, the semiconductor company has consistently increased dividends, with a compound annual growth rate (CAGR) of 14% in the last five years. Currently, KLAC pays an annualized dividend of $5.80, maintaining a yield of 0.75%.
In its fiscal fourth quarter, KLAC outperformed Wall Street's estimates by hitting revenue of $2.57 billion, marking 9% growth year-over-year and surpassing estimates by $54 million. Among its many critical hardware segments, a large portion of revenue came through the Defect Inspection segment, which brought in $1.17 billion, underscoring the growing demand for its inspection tools and systems.
Net income grew to $836 million, with a gross profit margin of 60%, which is quite impressive in the semiconductor sector. On an adjusted basis, KLAC's adjusted EPS edged past analysts' estimates at $6.60 per share, up 15% year over year.
Looking ahead, analysts anticipate KLAC's EPS to grow 22% to $29.09 this fiscal year, with revenue projected to grow to $11.45 billion.
Overall, Wall Street analysts have a consensus rating of "moderate buy" for KLAC stock, with a mean price target of $863.41. This implies an expected upside potential of 13.7% over Friday's close.
#2. Applied Materials
Founded in 1969, Applied Materials (AMAT) is a leading chip supplier, known for its semiconductor manufacturing equipment and services. In fact, the company holds the position of the world's largest semiconductor fabrication equipment supplier. Currently, AMAT boasts a healthy market cap of $162.8 billion.
Specifically, it provides critical tools and advanced logic and transistor technologies for producing integrated circuits (ICs) and chips, which are essential components in electronic devices, as well as in industrial applications. This advanced transistor technology creates significant growth opportunities for AMAT, expanding its potential market for transistor modules from $6 billion to $7 billion per 100,000 wafer starts per month in manufacturing capacity.
The company is on track to capture over 50% of the process equipment spending for transistor steps. Its strong position in interconnect technologies, essential for high-speed, low-power data transmission, could expand further with the adoption of backside power delivery in volume manufacturing, potentially adding $1 billion to the market. The shift to gate-all-around transistors has significantly expanded its market position, making the company a strong contender for future trillion-dollar semiconductor stock status.
Despite impressive gains of more than 40% over the past year, AMAT stock has pulled back about 24.9% from its July highs around $255.
AMAT's forward adjusted P/E ratio is 23.08, suggesting the stock is priced at a modest discount compared to the sector median. The company also pays its shareholders a quarterly dividend of $0.40 per share, yielding 0.81% annually.
In its fiscal Q3 earnings report on Aug. 15, AMAT beat Wall Street estimates on the top and bottom lines. The company reported net revenue of $6.77 billion, up 5.4% year-over-year, while adjusted EPS came in at $2.12, an increase of 11.5% from the prior-year quarter.
Looking ahead to fiscal year 2025, analysts are anticipating double-digit earnings and revenue growth for AMAT.
Overall, AMAT has received a consensus rating of “moderate buy” from Wall Street analysts, with the mean price target of $234.93 implying 22.3% upside potential.
#3. Lam Research Corporation
Founded in 1980, Lam Research (LRCX) is a key player in the semiconductor equipment industry. It provides advanced wafer fabrication solutions, focusing on etching, deposition, and cleaning processes essential for producing integrated circuits. The company is well-positioned to benefit from the growing demand for semiconductors and AI, especially as China ramps up its semiconductor product. Currently, about 42% of Lam's revenue comes from China.
LRCX stock has experienced a 31.6% correction since hitting its July peak of $1,130, even as the shares maintain a 52-week gain of more than 25%. Currently, LRCX is trading at 22x forward adjusted earnings, indicating that the stock is priced at a discount compared to its peers. Notably, the stock has a 10-for-1 split upcoming in early October.
Among all 3 companies on the list, Lam pays the highest dividend of $2.30 per share quarterly, translating to a 1.17% yield. That's backed by 9 years of consistent growth, at a 5-year CAGR of 13.5%.
After a few disappointing quarters due to temporary headwinds, Lam delivered impressive growth in its fiscal fourth-quarter earnings, with net sales hitting $3.87 billion, exceeding estimates by $40 million and notching 20.6% year-over-year growth. Net income was $1.02 billion, with adjusted EPS surpassing estimates at $8.14 per share.
Analysts are targeting double-digit EPS growth in each of the next two fiscal years for LRCX, reaching $44.49 per share by 2026.
Overall, Wall Street analysts have assigned a consensus rating of “moderate buy,” with a mean price target of $1,036. This indicates an expected upside potential of more than 34%.
