The semiconductor stocks to own in 2024, according to KeyBanc

Looking toward 2024, KeyBanc expects semiconductor revenue to return to growth as it sees inventories normalizing in the first half of the year and nearing the end of the cyclical destocking process, followed by a second half recovery. Further, the firm expects generative AI to remain a key demand driver for data center, and industrial and auto to continue to correct. KeyBanc’s key ideas are AMD (AMD), MKS Instruments (MKSI), Micron (MU), Nvidia (NVDA), and Teradyne (TER).

2024 OUTLOOK: KeyBanc expects 2024 semiconductor revenue, ex-memory, to return to growth and increase 8%, as it expects inventories to normalize in the first half of the year nearing the end of the cyclical destocking process, followed by a second half recovery. The firm also expects generative AI to remain a key demand driver for data center, with PC, smartphone, and server to resume modest growth. Additionally, it sees industrial and auto continuing to correct, but still anticipates auto semi growth given content drivers such as electrification.

For Semicap, the firm thinks 2023 will be the trough year for WFE in the low-$80B range before rebounding in 2024. Further, KeyBanc still anticipates continued appreciation given a soft-landing scenario for semis given significant industry consolidation and stable pricing environment, mitigating downside risk to margins and EPS; Generative AI, which it expects will create emerging growth opportunities beyond the data center in handsets and PCs; and continued secular growth in internet of things and content growth in auto and industrials.

KEY IDEAS: Given industry trends, KeyBanc’s key ideas given these industry trends are AMD, MKS Instruments, Micron, Nvidia, and Teradyne.

The firm raised its price target for Overweight-rated AMD to $170 from $140 as it believes that Ramp of MI300X GPU in a $150B AI accelerator TAM in addition to continued share gains of Genoa in servers should support outperformance. KeyBanc expects AMD to continue to gain server share vs. Intel (INTC), from a high 20% in 2023 to mid-30% in 2024, supported by product leadership and manufacturing advantages. With recovering traditional server demand, inventory digestion at end customers should be largely behind, setting up a solid path for ASP growth as Genoa ramps, it adds.

KeyBanc is also bullish on MKS as it has the widest breadth of WFE sub-system products, attractive Advanced Packaging exposure post-ATC, and long-term earnings power well above current estimates. Keeping an Overweight rating and a price target of $100 on Micron, the firm argues that tight supply in conjunction with demand recovery creates a favorable pricing set up, while the ramp of HBM3E should support an AI rerating narrative.

Meanwhile, Nvidia remains the best positioned play for generative AI, KeyBanc says, maintaining its Overweight rating on the shares with a price target of $650. Despite significant appreciation in 2023, with the stock up 239%, the firm expects outsized AI tailwinds to sustain. Lastly, KeyBanc highlights that Overweight-rated Teradyne has a strong semiconductor test portfolio, favorable exposure to continued 3nm node transition, and a market leading Robotics portfolio that provides alternate growth engine not tied to semiconductor industry.