As we look back on 2023, certain trends have become evident. Technology stocks have undeniably been among the standout performers, a trend that has persisted for quite some time. But in the hype surrounding the mega-cap ‘Magnificent 7,’ the tech giants that led the way, it’s been easy to lose sight of some other winners.
Within the S&P 500, the semiconductor industry stood out as the top-performing segment in 2023. Collectively, chip stocks surged by a 65%, strongly outperforming the index’s 24% gain.
Barclays analyst Tom O’Malley anticipates positive market trends for chip companies but acknowledges the challenge of finding compelling investment opportunities at current market levels. He advises investors to be selective in their investments, with a particular focus on companies associated with AI.
“We think investor focus has already shifted to ’25 where we are rolling out numbers across our coverage and assuming a robust positive inflection for most end markets. Even factoring in a strong growth year in ’25, there isn’t a ton of low-hanging fruit at these levels. With this said, we are picking our spots into next year and prefer names levered to the ‘2nd Wave of AI’,” O’Malley explained.
Among the top chip stocks that O’Malley has picked are Advanced Micro Devices (NASDSAQ:AMD) and NXP Semiconductors (NASDAQ:NXPI). The Barclays analyst sees double-digit upside potential for both, and ranks them highly. Let’s see why.
AMD
We’ll start with AMD, a long-time member of the world’s top ten semiconductor chip companies. The firm has been in business for over 50 years, and today boasts a market cap of more than $255 billion. By that measure, AMD is the sixth-largest semiconductor company globally, and the third-largest American chip maker.
AMD produces chips for a wide range of applications, including embedded processors and motherboard chipsets, microprocessors, graphics processors, and field programmable gate arrays for servers, workstations, and PCs. While this is a diverse range of applications, the company is still looking to expand its footprint, and is moving into the data center and gaming markets.
As part of this move to expand its business, AMD is also making a concerted effort to boost its profile in the AI segment. The company’s Instinct GPU accelerators, its Alveo Adaptive accelerators, and its EPYC server processors all target the rapidly growing AI business. New chipsets have also been released recently, designed for the AI sector. AMD’s Ryzen AI mobile processors and the Versal AI core adaptive SoCs are all top-of-the-line chips with the processing speed necessary to power generative AI applications.
The shift toward the AI market, and the new line of products to meet AI’s needs, are part of a new strategic focus for AMD. Higher demand for the new Ryzen chips, particularly the mobile processors and the Ryzen 7000 series CPUs, powered a strong gain in the company’s client segment revenue during 3Q23, the last period reported. The $1.5 billion top line in that segment was up 42% year-over-year.
For the company’s revenue as a whole, Q3’s total came to $5.8 billion, increasing 4.1% year-over-year and beating the forecast by $110 million. The bottom line figure, the non-GAAP EPS of 70 cents per share, was 2 cents better than had been expected.
The combination of AI and an overall strong business form the core of Tom O’Malley’s thesis on AMD. In his write-up on the stock for Barclays, the analyst says, “See ~$4B AI run-rate for AMD exiting ‘24 and introduce >$7B for ’25. We think the ramp is driven by multiple customers across hyperscale and Enterprise and more 2H loaded (we model 40% Q/Q growth in Q3/Q4). We checked back in with the supply chain post our Asia trip in November and are already hearing much stronger feedback on the MI300. The desire to overcome a software barrier from NVDA has put hyperscalers in a ‘chicken or the egg’ problem where they must deploy the hardware to get software learning. We are by no means discounting the lead that NVDA has but we think the desire to have a second source will overwhelm difficulties for the software ecosystem.”
O’Malley follows these comments with an Overweight (Buy) rating for the shares, and a $200 price target that points toward a one-year upside potential of 19%. (To watch O’Malley’s track record, click here)
Wall Street likes high-performing tech firms, and AMD has picked up 34 analyst reviews recently. These include 26 Buys to 8 Holds, for a Strong Buy consensus rating. However, the stock’s 119% share appreciation over the past year has pushed the value past the average price target of $149.77; AMD shares are currently trading for $168.11, and the Street is predicting a possible downside of 11%. It will be interesting to see whether the analysts raise their price targets or downgrade their ratings over the coming months. (See AMD stock forecast)
NXP Semiconductors
Based out of the Netherlands, NXP is a $53 billion semiconductor chip company that combines both design and production-run manufacturing capabilities. That has become something a novelty in the chip world. Many of the big chip makers focus mainly on design and farm out the manufacturing work to dedicated foundries; NXP still keeps both under one roof.
That roof provides cover for a solid business. NXP offers a range of products that solve customers’ problems. The firm’s chips include an array of chipsets for various aspects of modern computing, including: the autonomous vehicle niche; processors and microcontrollers; analog and mixed signal chips; audio and interface chips; chips for RF and RFID; power management, sensors, security and authentication; and wireless connectivity. All in all, it’s a wide-ranging list. NXP has found success the old-fashioned way, by identifying its customers’ needs, and meeting them.
That success has been significant. We can see just how significant by a quick look at some recent trailing 12-month numbers. NXP saw $13.17 billion at the top line in the last 4 reported quarters, and generated $3.45 billion in cash flow from operations over that period. During the same time, the company also was able to return $2.09 billion to its shareholders. Financial results of this scale require a large footprint, and NXP has more than 34,000 workers operating in more than 30 countries.
NXP last reported financial results for Q3 of 2023, and showed a total revenue figure of $3.43 billion. While this was down slightly – less than 1% – year-over-year, it was also $30 million ahead of expectations. The company’s earnings figure, reported as an EPS of $3.70 by non-GAAP measures, was up 27 cents per share from the previous quarter and was 11 cents per share higher than the forecast. NXP has guided toward revenue in the range of $3.3 billion to $3.5 billion for 4Q23; we’ll see in the first week of February how accurate that is.
In the meantime, we can turn to Barclays analyst O’Malley again, who explains why investors should start picking up shares of NXPI: “We think there will be a rotation back into Analog given the group’s underperformance vs. the rest of Semis. We see further correction in Auto but don’t think it’s the >20% seen in other end markets. When looking at the group we actually think NXP is most well positioned as they are the lowest off the prior peak, they undergrew during the pandemic, and using industry advertised growth rates of above 10% shows them as the best relative vs. Street estimates.”
Looking ahead, O’Malley rates NXPI shares an Overweight (i.e. Buy), along with a $260 price target, which implies a 12-month upside potential of 19%. (To watch O’Malley’s track record, click here)
So, that’s Barclays’ view, let’s turn our attention now to rest of the Street: NXPI’s 11 Buys, 6 Holds and 1 Sell coalesce into a Moderate Buy consensus rating. NXPI is trading for $217.50 and its average price target of $232.76 implies a one-year upside of 6.5%. (See NXPI stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
