Nvidia and Broadcom conducted 10-for-1 stock splits in 2024 to make shares more affordable. Their stock prices had appreciated substantially in the preceding years because both companies play a key role in the burgeoning artificial intelligence (AI) economy.
Lesser known AI infrastructure companies Lam Research (LRCX 0.72%) and Arista Networks (ANET +2.28%) are in a similar position. They completed stock splits last year to reset their soaring share prices, but certain Wall Street analysts still anticipate significant gains for shareholders in the coming year.
- Krish Sankar at TD Cowen has set Lam with a target price of $110 per share. That implies 22% upside from its current share price of $90.
- Ryan Koontz at Needham has set Arista with a target price of $145 per share. This implies 45% upside from its current share price of $100.
The analysts above are among the most bullish on Wall Street where Lam Research and Arista are concerned, so investors should treat their forecasts skeptically. But the stocks still warrant consideration given that both companies should benefit as AI infrastructure spending increases.
NASDAQ: LRCX
Key Data Points
1. Lam Research
The first step in semiconductor manufacturing is called deposition, which involves layering a silicon wafer with conducting and insulating materials. A light-sensitive coating is then applied to the silicon, and lithography machines print complex circuitry patterns on the wafer surface. Finally, etch systems are used to selectively remove materials added during deposition to reveal the pattern.
Lam has a strong presence in two wafer fabrication equipment (WFE) categories. It is the leading supplier of etch systems, and it ranks second behind Applied Materials in deposition systems. Lam products are heavily used in memory chip production, but foundry customers like Taiwan Semiconductor also use its systems to make logic chips like central processing units (CPUs) and graphics processing units (GPUs). In all cases, Lam should benefit as artificial intelligence (AI) increases demand for semiconductors.
Lam reported reasonably good financial results in the second quarter of fiscal 2025, which ended in December 2024. Revenue increased 5% to $4.3 billion, and non-GAAP net income increased 6% to $0.91 per diluted share. Importantly, AI is driving demand for more sophisticated semiconductor designs at the chip and packaging level. Lam is leaning into those opportunities, and management told analysts the company is on pace to gain WFE market share this year.
Wall Street estimates Lam's adjusted earnings will increase at 10% annually through fiscal 2026, which ends in June 2026. That makes the present valuation of 26 times adjusted earnings a little expensive. But analysts in the past have regularly underestimated earnings. Lam beat the consensus by an average of 7% in the last six quarters. If that continues, the current price would look sensible.
As a warning, Chinese customers accounted for about one-third of revenue in the recent quarter, making it Lam's most important geographic region. Trade tensions between the U.S. and Chinese governments could put downward pressure on that figure. Personally, I would feel more comfortable buying the stock if its price dropped 10% or so. But investors should definitely keep Lam on their watchlists.
NYSE: ANET
Key Data Points
2. Arista Networks
Arista provides high-performance networking solutions for enterprise and cloud data centers. The company complements its hardware portfolio, which includes switches and routers, with adjacent software for network automation, monitoring, and security. Arista is the leader in high-speed categories of the Ethernet switch market (i.e., 100+ Gigabit), with more than twice as much share as the closest contender, Cisco.
Arista says two key innovations let it disrupt the market. First, it provides a single version of its Extensible Operating System (EOS) that runs across all its hardware and simplifies network management. Second, it relies entirely on merchant silicon (chips built by third parties) rather than designing its own chips. That lets Arista focus R&D spending on software development and affords customers flexibility in selecting chips.
Arista reported fourth-quarter results that beat expectations on the top and bottom lines. Revenue rose 19% to $7 billion, and non-GAAP net income increased 31% to $2.27 per diluted share. The stock declined following the report because management said Meta Platforms accounted for 15% of revenue, down from 21% in the previous year. But Apple, Microsoft, and Oracle represented a greater percentage of total revenue.
Data centers in the future will need to modernize their network infrastructure to keep pace with advancements in artificial intelligence. Arista is ideally positioned to capitalize on demand for faster networking equipment given its leadership position in high-speed Ethernet switches. Wall Street expects the company's adjusted earnings to increase at 14% annually through 2026.
That makes the current valuation of 44 times adjusted earnings look a little pricey, but Wall Street has regularly underestimated its earnings. Arista beat the consensus forecast by an average of 15% in the last six quarters. If that continues, its current valuation would look quite reasonable in hindsight. Investors with a time horizon of at least three years should consider buying a small position today.
