The tech sector has continued to stay hot so far this year. Though valuations may be a tad uncomfortable for those who’ve yet to punch their ticket, it has to be comforting that the Wall Street crowd still views many of the high flyers (like AVGO, CDNS, and NOW) as Strong Buys.
Therefore, in this piece, we’ll look at TipRanks’ Comparison Tool to check in with those three impressive performers in the tech scene with generative artificial intelligence (AI) catalysts that could help them achieve more gains.
Broadcom (NASDAQ:AVGO)
While most of the attention in the semiconductor scene may be focused on the two top AI chip firms, diversified chip play Broadcom has quietly rocketed higher. While the $592 billion chip giant may not be the bountiful dividend payer it once was, it still stands out as one of the higher-growth plays in the semiconductor scene, at least according to many on Wall Street.
To take it further, I view AVGO stock as sporting a more palatable valuation — 27.4 times forward price-to-earnings (P/E) — versus many of its chip rivals. As such, I’m staying bullish on the stock but acknowledge that near-term turbulence could be in the cards.
It’s hard to believe that the stock used to command a dividend yield north of 3-4%. After more than doubling (up 112% in the past year), the yield has compressed to 1.64%. Looking back, it’s clear that Broadcom stock should never have fallen below $500 per share back in late 2022. Chalk that one as a misstep made by Mr. Market.
Despite the hot rally (or should I say melt-up) in the stock, JPMorgan (NYSE:JPM) analysts are raging bulls on Broadcom stock this year, going as far as to call it the biggest AI chip play after Nvidia (NASDAQ:NVDA). This is partly thanks to Broadcom’s “leadership position in AI-related products” such as high-end AI ASICs (application-specific integrated circuits) — a lower-power alternative to GPUs for AI acceleration.
Indeed, it’s not just about GPUs when it comes to AI hardware. Arguably, ASICs could experience a boom of their own as more firms look to tailor their hardware for specific AI applications. Of course, ASICs can be pricier to build from scratch, but depending on the AI application, I view them as deserving a larger slice of the AI chip pie in the future. When it comes to AI chips, it’s not all about GPUs. And Broadcom is a great way to play the customization chip trend as it looks to go after AI accelerators.
What Is the Price Target of AVGO Stock?
Broadcom stock is a Strong Buy, according to analysts, with 19 Buys and two Holds assigned in the past three months. The average AVGO stock price target of $1,222.22 implies 2.35% downside potential.
Cadence Design Systems (NASDAQ:CDNS)
Cadence Design Systems is another semiconductor play that’s been incredibly hot lately, but not to the magnitude of Nvidia. Cadence is a take on the chip design side, a corner of the market that itself could be made more efficient through the incorporation of new AI models.
Undoubtedly, chip design is an incredibly complicated field with higher barriers to entry. You need hardware engineers who really know their stuff to make an AI chip that’s up to standards. With AI thrown into the equation, the barriers could be lowered, perhaps drastically.
Indeed, if Cadence can get AI chip design right (early signs suggest that the company is, given the power of its Tensilica platform), there’s no telling how much higher the stock could fly as it looks to widen its moat. All secular growth drivers considered, I view Cadence as one of the most exciting AI plays right now and am staying bullish.
The only knock on CDNS stock lies in its valuation, with shares going for 76.9 times trailing price-to-earnings, well above the semiconductor industry average of 45.3 times but lower than the application software industry average of 86.1 times. As an application software play with skin in the chip game, I’d argue that the multiple may not be as high as it seems, assuming Cadence can outpace its rivals in the chip design scene.
Nonetheless, after releasing its earnings early this week, CDNS stock took a 4% hit to the chin as the firm stepped forward with some unimpressive Q1 guidance. Indeed, shares seemed priced for perfection ahead of the quarter. As shares pull back off their highs in response to the coming quarterly bout of weakness, perhaps dip buyers will finally have a chance to get into a name that has some very powerful secular growth drivers behind it.
What Is the Price Target of CDNS Stock?
Cadence stock is a Strong Buy, according to analysts, with three Buys assigned in the past three months. The average CDNS stock price target of $320.88 implies 9% upside potential.
ServiceNow (NASDAQ:NOW)
ServiceNow is a SaaS (software-as-a-service) workflow management firm that’s also been off to the race since bottoming back in late 2022. The company isn’t just melting up because its robust product is faring better again; investors are excited about the company’s ability to cash in on the AI opportunity.
According to ServiceNow’s chief operating officer, generative AI represents a $3 trillion opportunity for software firms. And ServiceNow wants a piece of the pie as it looks to funnel money into AI innovation to help its consumers save money and become more productive. Given this, I can’t help but be bullish on the stock despite the hefty 91.8 times trailing P/E.
ServiceNow’s chief executive officer, Bill McDermott, has also been upbeat about generative AI and his firm’s growth prospects. Following the latest quarterly earnings beat, McDermott described AI as a “breakthrough moment.” I think he’s right. The AI boom seems to have already landed for ServiceNow, and there’s no telling how much more impact it could have on future quarters.
The stock’s expensive, but it’s costly for a reason. Perhaps ServiceNow could be one of the more prominent software winners of the AI boom as it looks to experience its own Nvidia-like melt-up.
What Is the Price Target of NOW Stock?
ServiceNow stock is a Strong Buy, according to analysts, with 28 Buys and one Hold assigned in the past three months. The average NOW stock price target of $851.26 implies 10% upside potential.
The Takeaway
The tech tailwind seems to be alive and well going into February. Though valuations may become stretched, it seems like generative AI could be enough of an earnings growth driver to help firms “catch up” to their now-higher multiples. Of the trio, analysts see the most upside (10%) in shares of NOW for the coming year. ServiceNow certainly does seem to be the best pick of the batch right now as McDermott and his team continue to work their magic.
