With just a couple weeks left before it lands in the history books, 2023 looks like it’s going to end up as a fabulous year for semiconductor stocks. Through the end of last week the SOX semiconductor index gained 58% year-to-date – more than twice as strong a performance as the S&P 500 put in (up 23%) – as the semi industry recovered from its trough market in Q1 2023.
And that’s not even the best news. Less than one year into the recovery, Bank of America’s Vivek Arya, a 5-star analyst rated in the top 1% of the Street’s stock pros, reminds investors that semiconductor upcycles tend to last two to three years before turning down again, and that means… semiconductor stocks probably have at least another year of gains ahead of them – and perhaps even two years.
Heading into 2024, Arya forecasts an average of 15% sales growth for the year – perhaps choppy at first, with “areas of strength to offset potential weakness seen in 1H24 as corrections persist in the communications and industrial markets.” Specific areas of strength, says the analyst, will be found in artificial intelligence, in memory chips (with sales growing 48%), and with non-memory chip sales growing about 8%.
Among the semiconductor companies to watch, Arya highlights Advanced Micro Devices (NASDAQ:AMD), which he upgrades to Buy and assigns a $165 price target that implies nearly a 19% one-year gain. (To watch Arya’s track record, click here)
You won’t be surprised to learn that AI is a big part of the analyst’s buy thesis for AMD. Data center “accelerators” (needed to make AI functions run speedy-quick) are going to be a $100 billion market in 2024, says Arya, growing to anywhere from $150 billion to $400 billion by 2027. In the analyst’s view, AMD is “well-positioned to gain incremental share” away from incumbent Nvidia in these AI chips, even as it makes inroads on Intel’s server CPU market.
Does predicting a $400 billion accelerator market in 2027 (4x the current size) sound a bit optimistic? Perhaps – especially in light of the fact that just a few paragraphs before making that prediction, Arya said straight out that semiconductor cycles last two to three years, and this one started in early 2023. (I.e., If he’s right about the cycle, then growth should start petering out by the end of 2025).
And yet, in other respects Arya’s buy thesis for AMD actually sounds pretty conservative.
For example, the top analyst believes AMD only needs to capture $5.5 billion in accelerator sales by 2025, and $8 billion by 2026, for his valuation to work. That’s a pretty small percentage of the hypothesized total market size if the market is “only” $100 billion – and an even smaller percentage if the market grows to $150 billion, $400 billion, or more. And with AMD introducing new, lower priced AI chips to compete with Nvidia’s more expensive chips, it’s not hard to imagine how AMD might chip away at Nvidia’s 75% market share.
Ultimately, Arya believes investors can expect to see AMD grow from just $0.11 per share in trailing earnings today, to $3.88 per share in 2024, and $5.12 per share in 2025 – nearly 50x profits growth in just the next two years. No wonder he thinks AMD stock is a buy.
AMD has strong support amongst Arya ‘s colleagues, but its current valuation presents a conundrum. AMD’s Strong Buy consensus rating is based on 26 Buys and 8 Holds. However, the share gains keep coming in thick and fast, and the $131.47 average price target now suggests shares will decline by 5.5% over the next 12 months. (See AMD stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
