The semiconductor industry has been aggressively expanding its manufacturing capabilities amid the global chip shortage. And because the demand for semiconductors is expected to rise over time, the industry is well-positioned to witness double-digit growth over the next five years. Thus, we think fundamentally sound chip stocks Analog Devices (ADI), Lam Research Corporation (LRCX), and KLA Corporation (KLAC) could be ideal bets now. Let’s discuss these names.
Analysts expect the ongoing global semiconductor shortage to continue in 2022 due to strong demand for electronics, electric vehicles (EVs), and other products. However, the semiconductor supply is expected to improve beginning in mid-2022 as industry leaders expand their production capacities as new factories, which are currently under construction, become operational. Experts predict the industry to grow in the range of 15%-20% over the next three to five years.
The U.S. government has been taking steps to boost domestic semiconductor production capacity to make the U.S. globally competitive. Though the U.S. Innovation and Competition Act, which contains the CHIPS Act, is currently stalled in the House of Representatives, U.S. Commerce Secretary Gina Raimondo has urged the House to pass the legislation immediately.
Demand for semiconductors is expected to rise over time given the rapid digitization of virtually all industries. Thus, we think renowned semiconductor stocks Analog Devices, Inc. (ADI), Lam Research Corporation (LRCX), and KLA Corporation (KLAC) could be solid bets now.
Click here to checkout our Semiconductor Industry Report for 2021
Analog Devices, Inc. (ADI)
Norwood, Mass.-based ADI manufactures Integrated circuits (ICs), software, and subsystems that convert real-world analog signals to digital data. It also provides power management and microelectromechanical systems technology solutions. The company serves clients in industrial, automotive, consumer, and communications markets in the Americas, Europe, and Asia.
On October 5, ADI completed its inaugural sustainability-linked bond offering to raise $750 million. The proceeds from this offering are expected to be used to integrate environmentally sustainable production methods to reduce its overall carbon footprint. It was the first U.S. technology company to deploy three sustainable finance instruments as of October 5, 2021.
ADI’s net sales increased by 53% year-over-year to $2.34 billion in its fiscal fourth quarter, ended October 31, 2021. Its adjusted gross margin increased 90 basis points from its year-ago value to 70.9%. And its adjusted operating income came in at $1 billion, up 59% from the same period last year. Its Adjusted EPS increased 20% from its year-ago value to $1.73.
A $1.79 consensus EPS estimate for its fiscal year 2022 first quarter (ending January 2022) represents a 24% year-over-year improvement. The $2.61 billion consensus revenue estimate for the current quarter indicates a 67.2% increase from the same period last year. The company has an impressive earnings surprise history also; it beat the Street’s EPS estimates in each of the trailing four quarters.
The stock has gained 29.6% in price over the past year to close yesterday’s trading session at $180.25.
To see additional POWR Ratings for Growth, Stability, and Quality for ADI, click here.
Lam Research Corporation (LRCX)
LRCX manufactures semiconductor processing and wafer fabrication services and equipment globally. The Fremont, Calif.-based company sells its products and services to semiconductor and integrated device manufacturers globally. It has an ISS Governance QualityScore of 1, indicating relatively low governance risk.
On November 30, LRCX was named as a member of the Dow Jones Sustainability Index for North America for the first time. It is one of the top 30 sustainability performers among the 600 largest companies based in the United States and Canada. This highlights the efforts and progress that LRCX has made in its environmental, social, and governance (ESG) initiatives. LRCX aims to operate on 100% renewable energy by 2030 and reduce its carbon footprint to net-zero by 2050.
The company opened a new semiconductor manufacturing facility in Oregon in September. In the prior month, LRCX debuted its largest global semiconductor foundry in Malaysia. Given the surging demand for semiconductors amid a worldwide shortage, the expanded production facilities should boost the company’s revenues substantially over the long term.
In the fiscal year 2022 first quarter, ended September 26, 2021, LRCX’s net sales increased 35.5% year-over-year to $4.30 billion. Its operating income improved 42.8% from the same period last year to $1.37 billion, while its net income rose 43.3% from the year-ago value to $1.18 billion. Its EPS came in at $8.27, indicating a 47.9% improvement from the prior-year quarter.
Analysts expect LRCX’s revenue for its fiscal second quarter (ending December 2021) to come in at $4.41 billion, representing a 27.7% rise year-over-year. The $8.51 consensus EPS for the current quarter indicates a 41.1% improvement from the same period last year.
LRCX has gained 50.2% in price over the past year and 44% year-to-date.
It is no surprise that LRCX has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a B grade for Momentum and Quality. In addition, it is ranked #44 in the Semiconductor & Wireless Chip industry.
In total, we rate LRCX on eight distinct levels. Beyond what we have stated above, we have also given LRCX grades for Growth, Value, Stability, and Sentiment. Get all the LRCX ratings here.
KLA Corporation (KLAC)
Milpitas, Calif.-based KLAC is a global technology company that supplies process control and yield management solutions to semiconductor and nano-electronics industries globally. It manufactures semiconductor chips, packaging, surface profilers, and compound semiconductors. The company was named on the Fortune 500 list for the first time in 2021 and is ranked #468.
On November 5, KLAC opened a second headquarter in Michigan. This will be home to KLAC’s AI Center of Excellence, where machine learning applications will help advance semiconductor manufacturing.
During its fiscal year 2022 first quarter, ended September 30, 2021, KLAC’s total revenues increased 35.4% year-over-year to $2.08 billion. This can be attributed to a 42.3% rise in product revenues. Its net income improved 154% from the same period last year to $1.07 billion. And its EPS stood at $6.96, indicating a 158.7% rise from the prior-year quarter.
The Street expects KLAC’s revenue and EPS to increase 41.3% and 68.3%, respectively, year-over-year to $2.33 billion and $5.45in its fiscal year 2022 second quarter (ending December 2021). The company surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past year, the stock has gained 62% in price.
KLAC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our POWR Ratings system. KLAC has a B grade for Momentum and Quality. It is ranked #40 in the Semiconductor & Wireless Chip industry.
Click here to see the additional POWR Ratings for KLAC (Growth, Value, Sentiment, and Stability).
Click here to checkout our Semiconductor Industry Report for 2021
ADI shares were trading at $188.13 per share on Wednesday afternoon, up $7.88 (+4.37%). Year-to-date, ADI has gained 28.98%, versus a 24.93% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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