Semiconductor stocks have been enjoying an extended moment in the sun. Driven by last year’s main theme – the rise of AI – with many names in the space poised to benefit from AI adoption, investors have been leaning heavily into chip stocks since overall market sentiment shifted from bear to bull in the final months of 2022.
The stock market, however, is known to be a forward-thinking beast, and as such, the surge in chip names actually began while a downturn in the sector was still taking place. Now that the industry cycle has begun to turn positive again, does that mean the share gains have already been realized?
Not necessarily, says Cantor analyst C.J. Muse, who notes that going by past behavior, another strong year lies in wait for semi stocks.
“Yes, the SOX bottomed October 13th, 2022 and has risen by ~95% since that time,” says the 5-star analyst. “But fundamentals bottomed in 2Q23, and we are only 3 quarters into a fundamental upturn, which compares to the typical 9 Q’s over the last 7 cycles. If we assume the market discounts 2 Q’s ahead, this would suggest another strong year for Semiconductor stocks in 2024, with investors looking for an exit strategy late 2024/early 2025.”
So, which stocks represent the best opportunity for the coming year? Muse has an idea about that too, and has earmarked chip giants Nvidia (NASDAQ:NVDA) and AMD (NASDAQ:AMD) as names investors should seek out. And it’s not only Muse who thinks these equities are worth a punt. According to the TipRanks database, both are rated as Strong Buys by the analyst consensus. Let’s see why.
Nvidia
As noted by Muse, the Sox (the PHLX Semiconductor Index – the main industry barometer) has delivered some big returns for investors over the past 15 months. However, those have been put in the shade by the performance during the period of the sector’s superstar – Nvidia.
Since bottoming out in October 2022, the stock has delivered returns of 431%; Investors have piled in due to the company’s positioning as the AI stock. And not for nothing has it claimed that title.
Put simply, Nvidia has transitioned from primarily being a graphics company focused on the gaming sector to a leading provider of chips used in data centers. Its best-in-class products have been the first port of call for anyone involved in the AI game. To wit, it commands more than an 80% share of the AI chip market.
While hype often helps stocks rack up the gains regardless of real-world performance, here the stock’s ascendancy is based on the huge numbers Nvidia has been generating. Last year, Wall Street was stunned by the extent of the beat-and-raises offered in the company’s quarterly readouts.
The last statement released, for the company’s fiscal third quarter (October quarter), showed a top-line of $18.12 billion, representing a year-over-year increase of 205.6% and surpassing the Street’s forecast by a significant $2.01 billion. Within that, the Data Center numbers were even more impressive, rising by 279% from the same period a year ago to $14.51 billion. Similarly, at the other end of the equation, adjusted net income delivered an almost 600% y/y increase, reaching $1.46 billion and translating to adjusted EPS of $4.02, which was $0.63 ahead of consensus.
The last statement released, for the company’s fiscal third quarter (October quarter), showed a top-line of $18.12 billion, representing a year-over-year increase of 205.6% and beating the Street’s forecast by a conclusive $2.01 billion. Within that, the Data Center numbers were even more impressive, rising by 279% from the same period a year ago to $14.51 billion. Likewise at the other end of the equation, adj. net income delivered an almost 600% y/y increase to reach $1.46 billion, translating to adj. EPS of $4.02 while coming in $0.63 ahead of consensus.
Looking ahead to the fourth fiscal quarter (FQ4), Nvidia anticipates revenue will reach $20 billion, give or take 2%, an increase of nearly 231% compared to last year. The Street was only expecting $17.82 billion.
Even so, Muse thinks with the way things are shaping up for generative AI, the opportunity is still in its early days and that makes Nvidia a ‘Top Pick’ for 2024.
“Generative AI is the most significant platform transition in history – far greater than prior technology cycles (PC, Mobile, Internet), and we are only 12 months into it ― simply put, it’s too early to call a peak,” the analyst said. “NVDA is ‘the AI Platform’, offering both hardware and end-to-end software stack capabilities to support this once-in-a-generation investment cycle (with open-ended TAM); add in the fact that NVDA is moving to an annual technology cadence as well as a historical willingness to do anything to stay competitive/remain the leader, and we expect NVDA’s leading competitive position to continue.”
Accordingly, Muse initiated coverage of NVDA stock with an Overweight (i.e., Buy) rating and $775 price target, suggesting the shares will post growth of another 27% over the following year. (To watch Muse’s track record, click here)
Looking at the consensus breakdown, based on a total of 34 Buys vs. 4 Holds, NVDA claims a Strong Buy consensus rating. Going by the $675.40 average price target, a year from now, the stock will deliver returns of ~11%. (See Nvidia stock forecast)
Advanced Micro Devices
Ok, so Nvidia has established itself as the early runaway leader in the AI chip game, and its dominance is clear to see. But that doesn’t mean that it has the space all for itself. Other companies are going to be trying to eat away at its market share, and the one seen by many as its closest rival is Advanced Micro Devices.
Don’t estimate this company’s ability to pose a serious threat as AMD has done a similar thing in the past. The CPU space used to solely belong to Intel but boosted by its own line of excellent products and taking advantage of a series of wrong moves by the semi colossus, over the years, AMD has steadily eaten away at Intel’s dominance.
While not quite as stunning as Nvidia’s performance, both on the share gains front (up by 200% since hitting the October 2022 trough) and quarterly updates, AMD has also impressed over the past year.
Its most recent readout, for 3Q23 saw revenue rise by 4.1% year-over-year to $5.8 billion, beating the consensus estimate by $110 million. At the bottom line, adj. EPS of $0.70 came in 2 cents above the analysts’ expectations. That said, there was some disappointment with the guide as the company called for Q4 revenue of $6.1 billion, plus or minus $300 million, at the midpoint, below the Street at $6.39 billion.
Nevertheless, as Muse notes, it’s the prospect of the company being the one breathing down Nvidia’s neck that should be enticing for investors.
“With the market eagerly searching for alternatives to NVDA in accelerated computing, we view AMD as a key beneficiary,” Muse explained. “Add in sustained strength in DC CPUs, a modest recovery in PCs, and excellent operating leverage led by higher-margin Data Center and we expect buyside to continue to push to an estimated $6 in EPS as a stretch goal.”
“Our view is customers clearly want a 2nd source supplier to NVDA; the company is clearly helped by a deep partnership with MSFT, along with other key partners announced on December 6th (think META, etc.). With consensus modeling NVDA DC at $75B in CY24, it is not unreasonable to think an upside case of closer to $5B+ – as long as the supply chain can support this growth (and AMD is clearly working very hard here),” the analyst went on to add.
As such, Muse initiated coverage of AMD with an Overweight (i.e. Buy) rating to go alongside a $190 price target. That figure factors in growth of 7% over the one-year timeframe.
AMD stock also claims a Strong Buy consensus rating, based on a mix of 28 Buys vs. 8 Holds. However, some think the shares have overshot somewhat; to wit, the $159.47 average target represents downside of 10% from current levels. (See AMD 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.
