Amid a spectacular rally in semiconductor stocks during 2023, the sector emerged as among the strongest performers in the S&P 500. Despite this success, one analyst is cautioning investors that the group may be fairly pricey when considering 2024 estimates. However, the analyst remains bullish on companies poised to benefit from the “2nd Wave of AI.”
Analysis of the Situation: According to Barclays analyst Tom O’Malley, he remains cautious regarding the lofty 2024 consensus estimates for nearly two-thirds of the stocks he covers. However, he suggests that investor attention is now shifting to 2025. O’Malley anticipates a strong, positive inflection in most end markets during that period.
KeyBanc Capital Markets’ analyst John Vinh echoed O’Malley’s sentiments in a recent note, pointing out that most end markets, barring non-AI servers and Android smartphones, remained sluggish in the final quarter of last year.
While expressing optimism about the prospects in 2025, O’Malley tempered expectations, stating, “Even factoring in a strong growth year in ’25, there isn’t a ton of low-hanging fruit at these levels. We are picking our spots into next year and prefer names leveraged to the ‘2nd Wave of AI.’”
AMD Poised for Leadership: Barclays foresees Advanced Micro Devices achieving an AI revenue run-rate of $4 billion as it closes out 2024, with expectations for this figure to surpass $7 billion in 2025. This growth is anticipated to be driven by a heavier concentration of customers across the hyperscale and Enterprise sectors, with an emphasis on the latter half of the year.
Drawing on channel checks, the analyst noted the positive reception of the MI300 AI accelerator. O’Malley acknowledges the formidable position of Nvidia Corp. NVDA, but he believes that AMD’s desire to provide an alternative source will trump any software ecosystem challenges.
A Preferred Portfolio: Barclays has outlined a list of chip companies that it favors for the impending year and beyond:
- AMD: Overweight rating sustained, with the price target increased from $120 to $200
- Semiconductor equipment manufacturer Camtek Ltd. CAMT: Upgraded from Equal Weight to Overweight, with the price target raised from $65 to $82
- Coherent Corp. COHR: Promoted from Equal Weight to Overweight, with the price target elevated from $38 to $60
- Marvell Technology, Inc. MRVL: Maintained an Overweight rating, with the price target marginally raised from $70 to $75
- NXP Semiconductor N.V. NXPI: Upgraded from Equal Weight to Overweight, while the price target was lifted from $200 to $260
- Western Digital Corporation WDC: Uplifted from Equal Weight to Overweight, with the price target raised from $45 to $65
Highlighting the rationale behind the optimism for Coherent and Marvell, the analyst identified these manufacturers as the biggest potential beneficiaries of AI. He explained that traditional server interconnects previously accounted for around 10% of the bill-of-materials but that figure has now increased to approximately 30% in AI, as higher speeds and additional “east-west” connections between accelerators become increasingly crucial.
Camtek is expected to capitalize on the demand for high-bandwidth memory and advanced packaging required for AI chips. Barclays believes the company has a strong visibility into over 50% of their forecast for the year ahead, indicating that Camtek will continue to show favorable performance even after a robust 2024.
O’Malley also anticipates a resurgence of interest in flash and near-line hard-disk drives, which stands to benefit Western Digital. He remarked, “We think HDDs are a good neighborhood to play in over the next 2 years.”
Regarding auto chip suppliers, the analyst expressed confidence in NXP, deeming it “well positioned” due to its status at the lowest point from the prior peak and its underperformance during the pandemic. O’Malley compared industry growth rates of over 10%, which positions NXP favorably against Street estimates.
On Monday, the iShares Semiconductor ETF SOXX concluded the session, recording a 1.42% increase, closing at $565.29 based on Benzinga Pro data.
Next Read: Nvidia, AMD Shares Offer Over 30% Upside Potential, Analyst Says Ahead Of Earnings: What’s Driving The Chip Optimism?