Wall Street Wants You to Buy These 3 Chip Stocks for 2022

Citigroup has named its top three semiconductor picks for 2022. It isn't surprising to see the list consists of popular tech names such as Lam Research (LRCX 0.87%), Nvidia (NVDA 1.27%), and Applied Materials (AMAT 1.65%), as all three companies seem capable of beating the market once again next year.

These tech companies have delivered outstanding growth in 2021, and they're on track to replicate that performance in the new year. Let's see why that may be the case.

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1. Lam Research

The world's appetite for memory chips is increasing, and Lam Research is one of the best ways to play this market: The company gets most of its revenue by supplying semiconductor-fabrication equipment to manufacturers of DRAM (dynamic random access memory) and NVM (non-volatile memory).

According to third-party research, the memory market could clock an annual growth rate of 16% through 2024 and generate $367 billion in revenue at the end of the forecast period, compared to $173 billion in 2019. Lam Research is already making the most of the end market's terrific growth, as its recent results indicate. The company's revenue in the first quarter of fiscal 2022, which ended on Sept. 26, 2021, shot up 35% year over year to $4.3 billion. Meanwhile, adjusted earnings jumped 47% over the prior-year period to $8.36 per share during the quarter.

Image source: Getty Images.

This impressive growth was driven by the sharp jump in Lam's revenue from its systems segment, which accounted for 68% of its top line last quarter and recorded 36% year-over-year revenue growth. Lam got 64% of its systems segment revenue by selling fabrication equipment to memory manufacturers, which effectively means that the memory market accounts for 43% of the company's total revenue.

This bodes well for Lam's future since memory manufacturers are ramping up their investments to meet the anticipated growth in demand. Lam's earnings are expected to clock annual growth of more than 16% for the next five years, according to analysts' estimates. More importantly, investors can buy into this potential growth at an attractive valuation.

The stock has a trailing price-to-earnings ratio of 22.5, which represents a discount to last year's multiple of 26.8 and the S&P 500's P/E of 28. The sales multiple of 6.1 is also lower than 2020's multiple of 6.3, which means that investors have an attractive entry point into a stock that has a $750 price target at Citigroup and is the investment bank's No. 2 semiconductor pick for next year.

2. Nvidia

Nvidia is Citigroup's No. 3 semiconductor pick for 2022, which isn't surprising since the graphics specialist seems all set to sustain its outstanding growth, thanks to a variety of catalysts. Citi points out that Nvidia is on track to take advantage of the strong graphics processing unit (GPU) sales cycle, and the metaverse. This is likely to create the need for more GPUs and open a multibillion-dollar opportunity for the graphics specialist.

The positive commentary from Citi sent Nvidia shares soaring; the stock increased nearly 8% on Dec. 7. The chipmaker can keep up its hot stock-market momentum as a result of the robust demand for its graphics cards and its terrific market share. In gaming, for instance, Nvidia controls more than 80% of the discrete GPU market. The company has been able to satisfy consumer demand despite a chip shortage because its dominant position in the GPU market has allowed it to secure ample supply from foundry partners.

This places Nvidia in a solid position to corner a huge chunk of the anticipated increase in GPU sales. Jon Peddie Research estimates that the GPU market could add $15 billion in revenue from 2021 through 2023, indicating that Nvidia's revenue could jump sharply given its impressive market share.

Throw in the 80% market share Nvidia commands in the cloud and data center GPU space, according to estimates from research company Omdia, and it becomes easier to see why the company's rapid growth is here to stay. The demand for GPUs used in data centers is expected to increase at an annual rate of 43% through 2027 and hit $20.6 billion in sales, according to third-party research. These are the reasons why Nvidia's top and bottom lines are set for impressive growth as per analysts' estimates.

Data source: Nvidia Outlook.

All this indicates that Nvidia can continue to be a hot growth stock in 2022, so its inclusion in Citi's list of top chip stocks for next year makes sense.

3. Applied Materials

Applied Materials is Citi's top chip stock for 2022 with a price target of $175, which implies a 20% upside from Monday's closing. Shares of the semiconductor fabrication equipment supplier jumped more than 6% on Dec. 7 after Citi's report, but the good part is that shares are still affordable.

Applied Materials has a trailing price-to-earnings (P/E) ratio of 23 and a forward earnings multiple of 18. These multiples indicate that the stock is a steal right now; in comparison, the tech-heavy Nasdaq-100 index has a trailing P/E of 34.6 and a forward P/E of 29.7. So it isn't too late for investors looking to add a top semiconductor pick to their portfolios. Citi analyst Atif Malik points out that Applied Materials is likely to benefit from high levels of spending on semiconductor equipment over the next two to three years.

The company's revenue in fiscal 2021 (which closed on Oct. 31, 2021) increased 34% year over year to $23 billion, while adjusted earnings jumped 64% over the prior year to $6.84 per share. Applied Materials' outlook suggests that it isn't going to run out of steam. The company anticipates revenue to increase 19% year over year in the current quarter to $6.2 billion, while earnings are expected to jump 33% to $1.85 per share.

Its top and bottom lines are expected to increase by double-digit percentages for the full fiscal year. More importantly, analysts expect Applied Materials' earnings to increase at over 16% a year for the next five years. This isn't surprising given the massive end-market opportunity the company has at its disposal, in light of the potential increase in semiconductor capital investments, which should propel Applied Materials stock higher in the long run.