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Semiconductors remain catalysts of technological progress, driving trends like artificial intelligence (AI) and electric vehicles (EVs). The semiconductor industry has shone brightly this year, showcasing impressive growth, and it stands ready to anchor technological breakthroughs as 2025 approaches.
With the AI revolution in full swing, industry giants like Nvidia (NVDA), Broadcom (AVGO), and Marvell (MRVL) have dominated the spotlight, reveling in this year’s surge of AI-driven success. However, Bank of America’s top picks also include Lam Research Corporation (LRCX), ON Semiconductor Corporation (ON), and Cadence Design Systems, Inc. (CDNS).
BofA’s Vivek Arya envisions 2025 as "a year of two different trends." The 2024 AI-fueled chip boom may slow down earlier in the year, but as inventories stabilize and auto production revs up, momentum could shift. Emerging auto and industrial chipmakers might shine. Arya foresees AI giants holding ground while industrial innovators rise in this dynamic landscape.
According to Arya, Lam Research shines in flash-memory tools, poised to benefit from a capex recovery and easing China woes. ON Semiconductor eyes a rebound in EVs and autos, while Cadence Design Systems’ steady growth cements its role as the AI hardware frenzy begins to settle.
With semiconductor sales set to hit $725 billion by 2025, resilience defines the industry. To that end, semiconductor stocks LRCX, ON, and CDNS, could be compelling buys for investors chasing the next wave in the industry.
Semiconductor Stock #1: Lam Research
Lam Research Corporation (LRCX) powers the semiconductor industry with cutting-edge wafer fabrication equipment and services. With a $94.4 billion market capitalization, Lam drives the fourth industrial revolution, partnering with leading chipmakers worldwide. Operating across the U.S., Indo-Pacific, and EMEA, it designs advanced tools that shape integrated circuits, constantly redefining technical limits.
Shares of Lam Research rose an impressive 2,438% rise over the past two decades, but 2024 saw a 8.6% dip amid bearish semiconductor trends. However, with supply-demand shifts favoring chipmakers in 2025, LRCX could surge again, riding the wave of recovery in semiconductor fabrication.
LRCX is currently priced at 21.16 times forward earnings, trading at a discount to its industry peers.
Over the past decade, Lam has consistently rewarded shareholders with growing dividends, backed by strong margins and cash flow. On Nov. 7, it declared a quarterly dividend of $0.23 per share, payable to shareholders on Jan. 8.
At an annualized rate of $0.92 per share, Lam’s 1.3% yield slightly outpaces the S&P 500 Index’s ($SPX) dividend yield of 1.18%. With a low payout ratio of 25.9%, Lam has plenty of room to boost dividends, making it an attractive option for dividend-seeking investors in the chip sector.
Lam Research goes beyond dividends, actively repurchasing shares to return cash to shareholders. In the September quarter, it bought back $1 billion, surpassing its $261 million dividend payout. With strategic repurchases, Lam’s share count has dropped double-digits since 2019. Combined with a strong cash balance, this sets the stage for future dividend growth, especially with AI-driven momentum.
LRCX is bouncing back after a tough 2024, as stronger-than-expected fiscal Q1 2025 earnings sparked a 6.5% stock jump over the subsequent two trading sessions after the report on Oct. 23. Lam posted $4.17 billion in net revenue, a 19.7% year-over-year increase. Non-GAAP earnings rose 6.2% sequentially to $0.86 per share, beating estimates by 7.5%.
Lam’s $6.07 billion in cash, against $4.5 billion in debt, highlights its financial strength. Operating cash flow surged to $1.57 billion, nearly doubling quarter-over-quarter. With solid fundamentals and rising momentum, Lam proves its resilience in the chip market.
Lam Research’s CEO, Timothy Archer, highlights AI demand as the driving force behind growth, particularly in leading-edge logic nodes (NAND) and high-bandwidth memory (HBM).
While full-year guidance awaits next quarter, fiscal Q2 2025 projections look promising. Revenue is estimated to be around $4.3 billion, with a possible variance of $300 million, exceeding the previously guided range. The non-GAAP gross margin is forecast at 47%, and the non-GAAP operating margin is anticipated to be around 30%. Non-GAAP EPS is projected to be between $0.77 and $0.97.
Analysts tracking the company anticipate its profit to surge 17.1% year-over-year to $3.50 per share in fiscal 2025, with another 12.6% boost to $3.94 per share projected for fiscal 2026.
LRCX stock has a consensus “Moderate Buy” rating overall. Among the 29 analysts covering the stock, 16 suggest a “Strong Buy,” two recommend a “Moderate Buy,” and the remaining 11 analysts are playing it safe, advising a “Hold” rating.
As of writing, the mean price target of $93 suggests upside potential of 27.2%. The Street-high target price of $114 implies that the stock could rise as much as 55.3%.
Semiconductor Stock #2: ON Semiconductor
Arizona-headquartered ON Semiconductor Corporation (ON) provides integrated semiconductor products, offering solutions for power switching, signal conditioning, circuit protection, amplification, and voltage regulation. With a market cap of $28.1 billion, ON’s cutting-edge power tech plays a crucial role in driving automotive
ON Semiconductor has faced a bumpy ride since its 52-week high of $85.50, down 22.8% from that peak. With 2025 on the horizon, the stock has dropped nearly 25% this year, significantly trailing the broader market’s gains.
The chip stock is looking like a bargain after its recent slump, trading at just 16.77x forward adjusted earnings. That is a discount to both its tech peers and its own five-year average of 19.99x, making it an attractive pick for value-seeking investors.
On Oct. 29, shares of ON Semiconductor rose over 3% following its strong Q3 earnings results. The company pulled in nearly $1.8 billion in revenue, surpassing Wall Street’s expectations, while adjusted EPS of $0.99 also exceeded forecasts. ON’s dedication to shareholders is clear - returning an impressive 75% of its free cash flow through stock buybacks over the past year.
Despite some year-over-year revenue declines, ON Semiconductor’s Power Solutions Group (PSG) and Advanced Mobility Group (AMG) continued to be key contributors, while the Intelligent Sensing Group (ISG) saw 11% sequential growth. Through strategic investments and careful financial management, ON kept its revenue steady amid industry challenges.
In fiscal Q4, management projects revenue to come in between $1.71 billion and $1.81 billion, with non-GAAP gross margins expected to range from 44% to 46%. Adjusted EPS is forecast to be between $0.92 and $1.04, setting a solid foundation for a solid final quarter.
Analysts tracking ON Semiconductor expect the company’s profit to be $4.00 per share in fiscal 2024 and surge by 9.5% annually to $4.38 per share in fiscal 2025.
ON stock is looking bullish, with a “Moderate Buy” consensus from analysts. Out of 31 experts, 17 are all-in with “Strong Buy” ratings, including two fresh additions in the last two months. While one analyst holds a "Moderate Buy" and 11 suggest a "Hold," the bearish side is thin, with just one "Moderate Sell" and one "Strong Sell."
The average analyst price target of $86.67 indicates potential upside of 30% from the current price levels. The Street-high target of $107 suggests that the stock could surge as much as 62.1%.
Semiconductor Stock #3: Cadence Design Systems
San Jose-based Cadence Design Systems, Inc. (CDNS) is revolutionizing electronic systems design with over 30 years of expertise in computational software. Through its Intelligent System Design strategy, Cadence brings groundbreaking ideas to life, offering top-tier software, hardware, and IP. Its tools empower companies to create advanced semiconductors, essential for AI, 5G, and cloud innovations. With a market cap of $83.7 billion, Cadence is at the heart of industry transformation, fueling progress in everything from aerospace to autonomous driving.
Shares of Cadence Design have rallied 10% over the past year, inching closer toward their June high of $328.99.
CDNS’ high valuation, trading at 65.04x forward earnings, reflects investor confidence in its AI-driven growth. With its expertise in EDA, the company commands a premium, outpacing many tech peers on a price-sales basis, too. The ongoing AI revolution positions Cadence for sustained growth, justifying its elevated valuation.
CDNS stock surged 12.5% after delivering stellar Q3 earnings result on Oct. 28. Revenue climbed 18.8% year over year to $1.2 billion, with adjusted EPS soaring 30.2% to $1.64, beating expectations. Broad-based portfolio strength fueled growth, while the company reported a $5.6 billion backlog and $2.9 billion in current obligations.
As of Sept. 30, 2024, cash reserves had nearly tripled to $2.786 billion from Dec. 31, 2023, and long-term debt shrank to $2.475 billion. Cadence’s robust performance underscores its financial resilience and strong positioning in semiconductor design software.
Cadence Design Systems is riding high on the transformative power of AI. On its earnings call, CEO Anirudh Devgan highlighted how AI is revolutionizing Cadence’s operations, improving its IP blocks and enhancing its software platform. This creates a virtuous cycle – better AI-driven tools lead to superior chip designs, fueling even stronger AI capabilities. With AI propelling demand and innovation, Cadence is poised for sustained growth.
Looking ahead, increased R&D spending in AI automation, along with trends like 5G, hyperscale computing, and autonomous driving, will fuel demand for Cadence's end-to-end solutions. In Q3, sales of its Cadence.AI portfolio nearly tripled, highlighting the strong tailwinds driving the company’s growth.
For Q4, management anticipates revenue growth of 10.7% sequentially and 25.8% year-over-year, reaching $1.345 billion at the midpoint, with an adjusted operating margin of 45.7%. Non-GAAP EPS is projected between $1.78 and $1.84. For fiscal 2024, revenues are projected to be between $4.61 billion and $4.65 billion, while non-GAAP EPS is expected to be between $5.87 and $5.93.
Analysts tracking Cadence predict EPS of $4.75 in fiscal 2024, up 20% annually, with the bottom line projected to surge by another 17.9% to $5.60 in fiscal 2025.
CDNS stock has a consensus “Strong Buy” rating overall. Of the 17 analysts in coverage, 13 advise a “Strong Buy,” one suggests a “Moderate Buy,” two say it's a “Hold,” and the remaining one analyst has a “Strong Sell” rating.
