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Lam Research and KLA: 2 Must-Own Chip-Equipment Stocks

Amid the chip shortage, two key equipment stocks fly under the radar: Lam Research and KLA.

As long as the global chip shortage persists, investors should focus on adding shares of the top stocks in the industry.

And even after the supply-chain constraints ease, there’s still an argument for including semiconductor stocks in your investing strategy, since these components power many of the highest-growth end markets today.

While chipmakers like Nvidia  (NVDA) - Get NVIDIA Corporation Report, Qualcomm  (QCOM) - Get Qualcomm Inc Report and Advanced Micro Devices  (AMD) - Get Advanced Micro Devices, Inc. Report attract the lion's share of attention in the financial media, another area of the industry tends to fly under the radar while offering similar upside.

Semiconductor-equipment companies provide the tools needed to boost supply and could end up being great long-term holdings over the next few years. Their profit has soared in recent quarters as a result of record demand.

Keep in mind: The process for building intricately designed chips is becoming increasingly complex, which means that the expertise and advanced equipment that these companies have developed are massive competitive advantages.

Lam Research 

Take, for example, Lam Research  (LRCX) - Get Lam Research Corporation Report. The Fremont, Calif., company specializes in dry etch, an essential part of the manufacturing process in which material is removed using plasma-based technologies.

Every type of semiconductor device goes through the etch process, and demand for these types of tools will certainly remain strong as chipmakers continue to develop more advanced chips.

“Lam’s equipment and services allow customers to build smaller and better performing devices," Lam says on its website.

Since Lam Research is a leader in both the dry etch and deposition markets, it has plenty of room to continue capturing global market share. That's thanks to trends like cloud computing, 5G networks, the internet of things, and artificial intelligence, which all require advanced semiconductors.

Lam’s customers include international chipmakers like Micron  (MU) - Get Micron Technology, Inc. Report, Samsung and Taiwan Semiconductor  (TSM) - Get Taiwan Semiconductor Manufacturing Co. Ltd. Report.

The company recently topped consensus adjusted earnings estimates for Q3 as revenue advanced 35% to $4.3 billion. 

It’s worth noting that Wall Street is largely on board with the growth story here, as Evercore ISI analyst C.J. Muse recently added Lam Research to the firm’s Top Picks list and boosted his price target to $775 from $700.

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Lam Research stock has been consolidating for months and is currently breaking out to records. So keep an eye on how the shares react when the company takes part in the Credit Suisse 25th Annual Technology Conference on Nov. 30 and the Barclays Global Technology, Media And Telecommunications Conference on Dec. 7.

KLA Corp. 

Speaking of breakouts, KLA Corp.  (KLAC) - Get KLA Corporation Report is another semiconductor-equipment stock to watch as the tech sector tries to find its footing after the recent market pullback.

The Milpitas, Calif., company is a leader in the process diagnostic and control segment of the industry, which helps integrated-circuit manufacturers manage yield throughout the chip-manufacturing process.

In simple terms, KLA's equipment helps find chip defects, speeding chip development, and increasing profitability for chipmakers.

Considering how small and sophisticated chips have gotten over the years, it’s easy to see why KLA’s artificial-intelligence-enabled tools, which can help inspect and identify issues quickly, are in high demand.

According to Morningstar, the company has a 55%-plus market share in the PDC market.

There’s also a lot to like about the company’s expansive database of defects that its customers have dealt with in the past.

In fact, Lam Research wanted a piece of KLA: In 2015, it offered some $5 billion cash and 80 million common shares for the company.

Though the deal fell through, that deal proposal from another major chip-equipment company testifies to KLA's strength.

KLA's fiscal 2022 is off to a good start. It recently beat Q1 consensus adjusted-EPS estimates as revenue climbed 35% from a year earlier to $2.08 billion.

The beat resulted in a flurry of analyst upgrades and sent the shares to records. The stock has pulled back along with all of tech this week.

That makes KLA a good buy-the-dip candidate amidst market weakness, especially with demand for the company’s products starting to exceed prepandemic levels in a number of end markets.