Meta's In-House AI Chip 'Iris' to Begin Mass Production in September, Boosting Semiconductor Equipment Stocks

Meta Platforms (META-US) is reportedly planning to launch mass production of its in-house AI data center chip, codenamed 'Iris,' in September 2024. The news has triggered a broad rally in AI infrastructure-related stocks, with the Philadelphia Semiconductor Index (SOX) rising over 3%.

According to Barron's, citing Reuters, Meta is expected to begin production of the 'Iris' AI data center chip in September, utilizing custom-built silicon.

Meta has declined to comment on the reports.

The news boosted AI infrastructure-related equities, with optical communications equipment maker Lumentum (LITE-US) surging over 11%, ranking among the top gainers in the S&P 500 index. Applied Materials, Lam Research, KLA Corporation, and data center infrastructure provider Vertiv (VRT-US) also posted gains.

Markets believe Meta's push into self-developed chips will drive demand for wafer fabrication equipment (WFE). Applied Materials, Lam Research, and KLA are all leading suppliers of semiconductor manufacturing equipment used to process silicon wafers into microchips, positioning them to benefit directly.

Citi reported last month that the global wafer fab equipment market is expected to grow rapidly, driven by hyperscalers' expanding AI capital expenditures. The market is projected to grow from approximately $145 billion in 2024 to $200 billion by 2027, and further to $250 billion by 2028.

Citi also forecasts hyperscaler capex to increase 84% year-on-year in 2024, another 56% in 2027, and 38% in 2028. The combined capital spending of five major tech firms—Amazon (AMZN-US), Microsoft (MSFT-US), Alphabet (GOOGL-US), Meta (META-US), and Oracle (ORCL-US)—is expected to surpass $1.1 trillion by 2027, up from around $650 billion in 2024.

The AI investment boom is also lifting semiconductor equipment stocks.

Applied Materials, Lam Research (LRCX-US), and KLA Corporation (KLAC-US) have all seen their share prices rise over 90% year-to-date, reflecting optimistic market expectations for sustained growth in AI chip manufacturing demand.

Several Wall Street investment banks have recently raised their price targets for equipment stocks.

Mizuho Securities increased its price target for Lam Research from $380 to $400 and for Applied Materials from $540 to $650, maintaining an 'Outperform' rating on both. TD Cowen significantly raised its target for Applied Materials to $700 from $525.

Morgan Stanley maintained an 'Overweight' rating on both Lam Research and KLA, setting a $404 price target for each.

In addition to the expanding WFE market, Wall Street also expects tightening DRAM supply and rising investment in NAND flash memory to further boost demand for related equipment.

Morgan Stanley analyst Shane Brett expects Lam Research's upcoming Q4 earnings, due at the end of July, to exceed market expectations, with potential for upward revisions to guidance and updates on customer investment plans for fiscal 2027.

However, he noted that the market's real focus is whether the upward revision will surpass already highly optimistic consensus estimates.

Regarding KLA, Brett believes the long-term outlook remains positive, driven by expanding investments in advanced logic chips. However, he noted that short-term catalysts are largely priced into the stock, as current trading already reflects 2028 earnings expectations—meaning even an earnings beat may not be enough to drive further upside.