2 Semiconductor Growth Stocks With Market-Crushing Upside, According to Wall Street

The semiconductor sector was one of the best performers in 2021, with the iShares Semiconductor ETF returning 44% compared to 27% for the broad S&P 500 stock market index. It shouldn't come as a surprise, since consumer goods continue to trend further toward digitization, driving demand for increasingly advanced computer chips.

Other factors were also at play, including a persistent shortage of chips caused by pandemic-related shutdowns throughout 2020 and 2021, which has pushed semiconductor prices higher, boosting profits for the industry's manufacturers. And this tailwind could remain throughout 2022.

Image source: Getty Images.

Analysts expect the S&P 500 to return 9.6% this year, but there's a strong possibility the semiconductor sector will outperform it yet again. For investors wondering how to play this, a top Wall Street analyst firm thinks chip producers Advanced Micro Devices (AMD +5.15%) and Micron Technology (MU 0.35%) could soar by 61% and 103%, respectively. Here's why.

1. The case for Advanced Micro Devices

Advanced Micro Devices produces some of the most sought-after semiconductors globally, for a range of applications that include gaming, data centers, and advanced technologies like artificial intelligence and virtual reality. The company reported its full-year 2021 results on Feb. 1, revealing record revenue and earnings per share and triggering a wave of analyst upgrades on Wall Street.

The company's chips power popular consumer products like Sony's PlayStation and Microsoft's Xbox, and AMD even inked a deal with Tesla in 2021 to power the infotainment systems in its Model S and Model X electric vehicles. The automotive segment could be a major source of growth for AMD in the future, as that industry trends further toward electrification and autonomous driving, which require highly advanced computing hardware.

But even in the present, the company is generating remarkable financial performance.

Data source: Advanced Micro Devices. CAGR = compound annual growth rate.

While chip shortages and higher prices boosted AMD's profitability in 2021, the company has a significant growth opportunity in the pipeline, with its $35 billion acquisition of Xilinx, which is set to close in the first quarter of 2022. It will see AMD lead the industry in high-performance and adaptive computing, expanding the scope of its product portfolio and growing its total addressable market.

AMD's prospects are so bright that Wall Street firm Rosenblatt Securities thinks its stock could soar to $200 a share. That would represent a gain of 61% from its current price of $123.60, which is more than six times the expected return of the S&P 500 in 2022.

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2. The case for Micron Technology

Like AMD, Micron Technology's semiconductor products are also in hot demand, except they serve a slightly different purpose. The company is the global leader in memory and storage chips, which are used in data centers and personal computing applications. But it's making advanced hardware for 5G technologies and the automotive industry, too.

In the modern economy, companies continue to migrate their operations online, which creates a growing need for solutions to manage and store their data. Data centers, therefore, play an increasingly critical role in the corporate world, and whether companies are spending billions of dollars building their own or outsourcing to specialist cloud service providers, Micron's chips are likely featured in parts of the infrastructure.

But it's rapidly growing technologies like 5G that are most exciting for Micron. Smartphones running on the 5G network typically need up to 50% more memory and double the storage compared to previous 4G and 3G iterations, and the company currently makes the fastest mobile DRAM product on the market. Sales of 5G-enabled smartphones could grow by 40% from 500 million units in 2021 to 700 million units in 2022, presenting an attractive opportunity for Micron over the next few years.

Data source: Micron, Yahoo! Finance. CAGR = compound annual growth rate.

Analysts anticipate a highly profitable year for Micron in fiscal 2022, further highlighting the beneficial environment for chip producers. But as new technologies continue to gain momentum, the company is well-placed to outperform in the future. It expects strength in its automotive segment, for example, with 2022 model electric vehicles supporting memory- and storage-hungry autonomous driving capabilities.

Wall Street firm Rosenblatt Securities predicts 103% upside for Micron stock, with a lofty price target of $165. But over the long term, that might even be conservative.