The dawn of the artificial intelligence (AI) era has thrust the semiconductor industry into the limelight, igniting a fervor around high-powered chips essential for AI operations. While Nvidia (NVDA) shines as a semiconductor stalwart, Taiwan Semiconductor Manufacturing Company (TSM), affectionately known as TSMC, emerges as a pivotal figure in the global tech supply chain. Renowned for fabricating chips for tech behemoths like Apple (AAPL), Nvidia, and Qualcomm, TSMC boasts a reputation that precedes it.
However, the AI wave isn’t just a boon for chipmakers. Companies orbiting the industry are set to benefit too. Take Lam Research (LRCX), for instance, a premier provider of wafer fabrication equipment and services to the semiconductor sector.
With a promising outlook, analysts foresee significant upside potential for both TSMC and Lam Research, predicting double-digit gains over the next year.
#1. Lam Research: A Beacon of Innovation
Lam Research (LRCX) spearheads the industry with cutting-edge wafer fabrication solutions, facilitating the production of sleeker, more powerful devices through advanced chip manufacturing.
Valued at $102.5 billion, Lam Research’s stock has seen a modest 1.3% uptick year-to-date, trailing the S&P 500 Index’s 20% leap.
Lam Research boasts robust financial performance, buoyed by soaring demand for semiconductors across diverse sectors. In the quarter closing on June 30, total revenue surged by 2.1% to $3.87 billion, with adjusted EPS climbing by 4.5% to $8.14 per share.
Despite the sector’s cyclical nature, Lam Research maintains a pioneering stance in etch and deposition technologies crucial to semiconductor production.
Systems revenue, constituting 56% of total revenue and encompassing sales of cutting-edge equipment in the deposition, etch, and clean markets, surged by 26.8% in the June quarter. Additional revenues from customer support and related services witnessed a 14% yearly uptick.
Lam Research, with an annualized forward yield of 1.17%, slightly below the tech sector average, has elevated its dividends over the past decade. Most recently, the company hiked its quarterly dividend by 15% to $2.30 per share.
The surge in demand for advanced technologies spanning computing, AI, cloud services, electric vehicles, and the IoT foreshadows rapid growth in the global semiconductor arena. As a key supplier of critical manufacturing equipment, Lam Research is poised to ride this wave.
Reviewing the horizon, analysts foresee an 18.1% earnings uptick in fiscal year 2025 and a robust 27.4% rise in fiscal year 2026, rendering Lam as an appealing prospect, trading at 21.6 times forward earnings.
Wall Street sentiment leans toward a “moderate buy” for LRCX stock, with 27 analysts providing coverage. Among these, 16 advocate a “strong buy,” two suggest a “moderate buy,” while nine maintain a “hold” stance.
The average analyst target price for LRCX stands at $1,040.92, indicating a 31% potential upside. Moreover, the lofty Street-high estimate of $1,325 implies the stock could surge by 66% over the ensuing 12 months.
#2. Taiwan Semiconductor: Pinnacle of Innovation
Taiwan Semiconductor (TSM) stands tall as the globe’s largest and most advanced semiconductor foundry, pioneering cutting-edge chip nodes like the 3-nanometer and 5-nanometer technologies central to next-gen computing, AI, and mobile applications. TSMC’s entwined fate with Nvidia as its primary business partner underscores its industry clout.
Bolstered by the semiconductor sector’s proliferation, Taiwan’s stock has soared by a staggering 73.6% year-to-date, outpacing broader market metrics.
In the second quarter, TSMC witnessed a remarkable 32.8% year-on-year surge in total revenue, reaching $20.8 billion, propelled by substantial contributions from its leading 5nm and 7nm process nodes, constituting 67% of total wafer revenue.
Anticipating robust demand for cutting-edge process tech in smartphones and AI realms, management foresees a robust third-quarter performance, with revenue projected in the range of $22.4 billion to $23.2 billion, reflecting a 32% surge from the year-ago period.
Taiwan Semiconductor extends dividends, boasting an annualized forward yield of 1.41%, slightly surpassing the tech sector average, with a forward payout ratio of 29.8%, signaling sustainable dividends with growth potential.
The uptick in advanced chip demand heralds substantial revenue escalations in forthcoming years. Analysts predict a 28% revenue increase in 2024 and a solid 24.2% climb in 2025, with earnings also forecasted to surge by 27.4% and 26.6%, respectively, over the subsequent two fiscal years.
Despite its preeminent market stance, TSMC remains appealingly priced in comparison to U.S.-based rivals like Nvidia and AMD, trading at 26.4 times forward 2024 earnings. TSM stock opens a gateway to the industry’s pinnacles and expansion into new markets.
Valued at $906.3 billion, Taiwan Semi teeters on the brink of the $1 trillion market cap echelon. Wall Street exudes confidence in this mega-cap stock, branding it a “strong buy,” with 10 analysts entering coverage. Among these, eight advocate a “strong buy,” one leans toward a “moderate buy,” while one maintains a “hold” position.
The average analyst target price for TSM stands at $204.71, hinting at a 13.2% upside potential. Meanwhile, the optimistic Street-high estimate of $250 suggests a potential 38.3% rally over the ensuing year.
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The author, Sushree Mohanty, holds no positions in the stocks mentioned. All information presented is for informational purposes only. Refer to the Barchart Disclosure Policy for further details.
Opinions highlighted in this article are the author’s own and do not necessarily mirror those of Nasdaq, Inc.
