The Overlooked Semiconductor Stock Poised to Lead in the AI Race

Artificial intelligence (AI) computing has transformed the stock market. Dominant players like Nvidia, Micron Technology, Broadcom, and Taiwan Semiconductor Manufacturing have driven the lion's share of the action during this almost four-year-long bull market.

But the impact of AI on the markets and the economy runs deeper than the major players. Secondary suppliers that cater to niche and emerging areas of the AI universe are also seeing the demand for their products increase.

One of those areas involves the quality-control function of AI chips -- making sure that all of those GPUs, CPUs, memory chips, and other parts of the AI architecture actually work as they are supposed to. That's where Camtek (NASDAQ: CAMT) comes in.

This under-the-radar AI stock is one of the leaders in its space, and it is poised for strong earnings growth as AI capabilities expand and demand grows.

Image source: Getty Images.

Leader in chip inspection

Camtek makes systems and equipment to inspect and measure semiconductor chips and advanced chip packages throughout their production process. This is essential because if even one chip within a package is faulty or defective, the device won't function properly.

Within the niche of advanced packaging inspection and metrology, or measurement, Camtek is the dominant player with about 60% market share. And this area of its business is growing. In its most recent quarter, some 80% of its orders were for advanced packaging inspection. The surge was driven by memory chip manufacturers. Their transition to HBM4 chips and their efforts to expand production amid the memory shortage have meant more foundries getting built and upgraded, and those facilities all require inspection equipment.

In Q2, Camtek's revenue rose 8% year over year to a record $133 million. Third-quarter revenue is expected to rise about 20% sequentially to around $159 million. Overall, in the second half of this year, it projects 25% revenue growth over the first half, led by growth in its advanced packaging business.

"Our leading position in the advanced packaging market is expected to drive approximately 45% growth in our advanced packaging business in the second half of 2026 compared with the first half," CEO Rafi Amit said on the Q2 earnings call.

47% annualized returns over the past 10 years

There is significant growth ahead for Camtek, as most of the orders coming in now will be executed in 2027.

On a broader scale, the larger advanced packaging inspection industry is expected to grow at a compound annual rate of 11% over the next five years to $6.2 billion, up from $3.7 billion in 2026.

Camtek stock is up 25% year to date and 52% over the past 12 months. However, it has also plummeted by some 35% from the peak it touched in May, mainly due to its high valuation. The stock has posted incredible returns over the long term, with average annualized returns of 25% over the past five years and 48% over the past 10 years. However, that boosted its P/E ratio to sky-high levels that may have precipitated the recent sell-off. Even after that retreat, its trailing P/E is around 184.

But its forward P/E ratio is a more reasonable 27 based on its expected earnings growth. Analysts are bullish on the stock, with a median price target of $190 per share, which would suggest 42% upside.

Dave Kovaleski has positions in Micron Technology. The Motley Fool has positions in and recommends Broadcom, Micron Technology, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.