The semiconductor industry seems have found a new growth catalyst in the form of AI that could keep it thriving and abuzz for years to come, as analysts see no end in sight for the demand for AI-specific chips needed to power generative AI applications that would be ubiquitous from just a few years from now. Earlier this month, analysts at Citi published a bullish note for semiconductor stocks, citing strong March sales, which jumped about 15.7% year over year to total $50.6 billion. The figure was higher than Citi’s $50.1 billion estimate. Citi analyst Christopher Danely highlighted that most of the demand bump came from analog and microcontrollers, which were up about 50% on a month-over-month basis.
Are AI Semiconductor Stocks Overvalued?
Semiconductor stocks have run so much on the back of the AI boom that many are voicing valuation concerns. And it’s always surprising when such concerns come from Cathie Wood, one of the notable growth investors of this age who poured (and lost) a fortune into hyper-growth stocks trading at eye-popping valuations. In March, Cathie Wood warned that the semiconductor space could see a “correction.” However, Wood clarified that she’s just expecting a “correction” and not an “end” of the sector.
Since the end of March, VanEck Semiconductor ETF (NASDAQ:SMH) is up 10%.
But Cathie Wood isn’t alone in these valuation worries. Analysts believe since the AI-rally is no longer limited to big names like NVIDIA Corp (NASDAQ:NVDA) and MSFT, investors should caste a wider net. And we did just that. Our latest research unlocked many AI-related stocks trading at attractive valuations. If you are looking for an AI stock that is as promising as Microsoft but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
For this article we used stock screeners and did manual research to see which AI-related semiconductor stocks were generating the most buzz. From these stocks we chose the ones with the highest number of hedge fund investors and strong YTD gains. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
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10. ON Semiconductor Corp (NASDAQ:ON)
YTD Price Performance: +14%
During the first quarter of 2023, ON Semiconductor Corp (NASDAQ:ON) earned $1.08 per share, beating estimates by $0.03. Revenue fell 5.1% year over year to $1.86 billion, surpassing estimates by $10 million. Jefferies recently started covering the stock with a Buy rating. Citi also has a Buy rating on the stock.
Artisan Mid Cap Fund stated the following regarding ON Semiconductor Corporation (NASDAQ:ON) in its first quarter 2024 investor letter:
“Among our top detractors were Atlassian, ON Semiconductor Corporation (NASDAQ:ON) and Exact Sciences. ON Semiconductor is a leading designer and manufacturer of chips for power management and image sensing. From a battery-electric vehicle (EV) standpoint, ON is a leading producer of silicon carbide chips. Shares have been under pressure as the company grapples with multiple quarters of inventory right-sizing across the entire auto supply chain and slower-than-expected growth of EV sales. However, ON is seeing smaller sales declines than peers due to market share gains, and we believe the company will be equally well positioned if automakers rebalance their efforts from full EVs toward hybrid vehicles. We remain patient.”
9. Microchip Technology Inc (NASDAQ:MCHP)
YTD Price Performance: +10%
Microchip Technology Inc (NASDAQ:MCHP) makes microcontroller, mixed-signal, analog, and Flash-IP integrated circuits. The stock recently took a hit after reporting weak fiscal Q4. Adjusted EPS in the period came in at $0.57, meeting estimates. Revenue fell 40.4% year over year to $1.33 billion, missing estimates by $10 million. Jefferies recently started covering Microchip Technology Inc (NASDAQ:MCHP) stock with a Buy rating. B. Riley on May 7 increased its price target on the stock to $110.
Here is what Weitz Conservative Allocation Fund has to say about Microchip Technology Incorporated (NASDAQ:MCHP) in its Q3 2023 investor letter:
“We added a new position in Microchip Technology, Inc., (NASDAQ:MCHP) to the Fund during the quarter. Microchip is a leading provider of mixed signal microcontrollers and analog semiconductors to a broad range of industrial, data center, automotive, communication and consumer appliance customers. The company enjoys favorable product characteristics that help drive strong profitability, and it benefits from several long-wave demand tailwinds such as electronification, automation, and growth in data communications. While Microchip is not immune from semiconductor cycles, its cash flows have been durable through cycles. The multi-year outlook is solid, and we think the company is poised to further boost per-share value growth through increasing share repurchases at discounted prices.
8. Analog Devices, Inc. (NASDAQ:ADI)
YTD Price Performance: +17%
Citi’s Christopher Danely reiterated his Buy rating on Analog Devices, Inc. (NASDAQ:ADI) last month in a note commenting on strong sales data for the semiconductor industry in March.
Madison Investors Fund stated the following regarding Analog Devices, Inc. (NASDAQ:ADI) in its first quarter 2024 investor letter:
“At semiconductor manufacturer Analog Devices, Inc. (NASDAQ:ADI), end-market demand continues to decline as customers and distributors reduce inventory after building it up during the supply chain induced shortages a few years back. Despite these near-term trends, we remain confident that large parts of the global economy will continue to digitize over the long-term, thereby driving strong demand for analog semiconductor chips.”
7. Advanced Micro Devices, Inc. (NASDAQ:AMD)
YTD Price Performance: +19%
Advanced Micro Devices, Inc. (NASDAQ:AMD) is one of the top AI semiconductor stocks to own for the long term despite Advanced Micro Devices, Inc. (NASDAQ:AMD) lagging behind market leaders like Nvidia. Last month Advanced Micro Devices, Inc. (NASDAQ:AMD) posted strong Q1 results. Adjusted EPS in the period came in at $0.62, beating estimates by $0.01. Revenue jumped 2.2% year over year to $5.47 billion, beating estimates by $20 million. For the second quarter, Advanced Micro Devices, Inc. (NASDAQ:AMD) expects revenue in between $5.4 billion and $6 billion, while estimates called for $5.72 billion
J.P. Morgan analyst Harlan Sur said Advanced Micro Devices, Inc. (NASDAQ:AMD) can significantly increase its data center GPU revenue and can continue to poach market share from Intel in server and PC CPUs market.
Meridian Contrarian Fund stated the following regarding Advanced Micro Devices, Inc. (NASDAQ:AMD) in its fourth quarter 2023 investor letter:
“Advanced Micro Devices, Inc. (NASDAQ:AMD) is a global semiconductor chip maker specializing in central processing units (CPUs), which are considered the core component of most computing devices, and graphics processing units (GPUs), which accelerate operations running on CPUs. We invested in 2018 when it was a mid-cap value stock plagued by many years of underperformance due to lagging technology and lost market hi share versus competitors Intel and Nvidia. Our research identified that changes and investments made by current management under CEO Lisa Su had, over several years, finally resulted in compelling technology that positioned AMD as a stronger competitor to Nvidia and that its latest products were superior to Intel’s. We invested on the the belief that AMD’s valuation at that that time did not reflect the potential for its technology leadership to generate significant market share gains and improved profits. This thesis has been playing out for several years. During the quarter, AMD unveiled more details about its upcoming GPU products for the AI market. The stock reacted positively to expectations that AMD’s GPU servers will be a viable alternative to Nvidia. Although we pared back our exposure to AMD into strength as part of our risk-management practice, we maintained a position in the stock. We believe AMD will continue to gain share in large and growing markets and is reasonably valued relative to the potential for significantly higher earnings.”
6. Marvell Technology Inc (NASDAQ:MRVL)
YTD Price Performance: +30%
Last month, Susquehanna said in a note that its demand checks related to AI chips are strong. Susquehanna’s Christopher Rolland said “further upward revisions to prior AI guidance” for several AI chips companies including Marvell Technology Inc (NASDAQ:MRVL) are “likely necessary.”
5. Broadcom Inc (NASDAQ:AVGO)
YTD Price Performance: +28%
Earlier this month, Citi published a bullish note on the semiconductor industry following strong March numbers released by the Semiconductor Industry Association which showed the sector sales jumped about 16.4% month over month to $50.6 billion. Citi reiterated Buy ratings for several stocks, and Broadcom Inc (NASDAQ:AVGO) was one of them.
Carillon Eagle Growth & Income Fund stated the following regarding Broadcom Inc. (NASDAQ:AVGO) in its fourth quarter 2023 investor letter:
“Broadcom Inc. (NASDAQ:AVGO) traded higher after closing on its acquisition of VMware. The company also announced earnings that were relatively in line with estimates with some benefit of better operating expenses. The stock appears to be one of the first real beneficiaries of generative artificial intelligence (AI) with meaningful revenue expected to show up in 2024.”
4. Qualcomm Inc (NASDAQ:QCOM)
YTD Price Performance: +48%
Qualcomm Inc (NASDAQ:QCOM) is in the news after Qualcomm Inc (NASDAQ:QCOM) lost license to supply processors to Huawei following the US government’s tough action to punish the Chinese firm. Last month, UBS published a list of its highest-conviction AI-themed stock ideas for the next 6 to 24 months. Qualcomm Inc (NASDAQ:QCOM) was part of the list. On May 1, Qualcomm Inc (NASDAQ:QCOM) posted a solid quarter. EPS in the period came in at $2.44, beating estimates by $0.12. Revenue in the quarter jumped 1.3% year over year to $9.39 billion, surpassing estimates by $40 million.
Madison Sustainable Equity Fund stated the following regarding QUALCOMM Incorporated (NASDAQ:QCOM) in its fourth quarter 2023 investor letter:
“QUALCOMM Incorporated (NASDAQ:QCOM) also reported a solid fourth fiscal quarter with better than expected results. The company guided the first quarter ahead of expectations despite headwinds from Samsung as the inventory headwinds dissipate. Qualcomm remains well positioned in the mobile handset market and should benefit as Artificial Intelligence moves to edge devices which could drive an upgrade cycle.”
3. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM)
YTD Price Performance: +52%
Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) surged earlier this month after the company posted blockbuster numbers for April, reporting a 60% increase in revenue for the month. Taiwan Semiconductor Mfg. Co. Ltd.’s (NYSE:TSM) revenue in the quarter ending April 30 increased 26.2% from a year ago. Top companies like Nvidia, Apple, AMD and Qualcomm rely on Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) for their chips. Taiwan Semiconductor Mfg. Co. Ltd. (NYSE:TSM) shares have gained about 52% so far this year.
Third Point Management stated the following regarding Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) in its first quarter 2024 investor letter:
“During the quarter, we added to our Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) investment, which we initiated in May of last year. TSMC is coming off its worst year since the Global Financial Crisis, and in the years to come we see a combination of cyclical recovery plus structural growth in AI demand fueling substantial earnings growth for the company.
We view TSMC as the “toll road” of the semiconductor industry, particularly for AI compute. TSMC holds more than 90% market share for leading edge semiconductor manufacturing, where all AI silicon is being processed. Beyond their reliable execution producing some of the most complex products on earth in volume, TSMC has spent decades optimizing for and building ecosystems around their 500+ customers, an advantage that cannot be replicated overnight…” (Click here to read the full text)
2. Micron Technology Inc (NASDAQ:MU)
YTD Price Performance: +60%
Earlier this month, Citi reiterated that Micron Technology Inc (NASDAQ:MU) remains its top pick in the semiconductor industry. The investment firm was commenting on latest data from the Semiconductor Industry Association that showed March sales in the semiconductor industry jumped about 15.7% on a YoY basis to $50.6 billion.
Citi’s Christopher Danely said this data shows “analog inventory replenishment in 2H24, and we remain bullish on the group.”
Sequoia Fund stated the following regarding Micron Technology, Inc. (NASDAQ:MU) in its fourth quarter 2023 investor letter:
“Exits last year included Netflix, Bank of America and Micron Technology, Inc. (NASDAQ:MU). As discussed in our Q2 shareholder letter, we exited Micron after the rationale for our investment was strained by rising geopolitical tensions, which have increased investment risks in the high-performance semiconductor industry. These risks are bearable, but we felt it prudent to reduce the portfolio’s exposure to them. We think both Bank of America and Micron were purchased at conservative prices given the facts at hand, but the facts changed and we moved on.”
1. NVIDIA Corp (NASDAQ:NVDA)
YTD Price Performance: +138%
NVIDIA Corp (NASDAQ:NVDA) shares have jumped 138% so far in 2024 through May 13. Elevated expectations and competitors’ plans to make chips in-house threw some water on NVIDIA Corp’s (NASDAQ:NVDA) momentum. However, long-term investors are still piling into the stock amid huge AI chips demand. Earlier this month, Goldman Sachs’ Toshiya Hari increased his price target for NVIDIA Corp (NASDAQ:NVDA) to $1,100 from $1,000 and reiterated his Buy rating.
Patient Capital Opportunity Equity Strategy stated the following regarding NVIDIA Corporation (NASDAQ:NVDA) in its first quarter 2024 investor letter:
“This quarter we entered two new positions, while exiting four positions. Our first new position was NVIDIA Corporation (NASDAQ:NVDA), which we bought early in the quarter. Nvidia is the market leader in designing and selling Graphics Processing Units (GPU), which has recently benefited from the insatiable demand of artificial intelligence (AI) models. The company currently captures 92% market share of data center GPUs and grew revenue, earnings and FCF an astounding 126%, 392%, and 610%, respectively, over the last year. While much of the focus is on Nvidia’s market cap reaching $2.3T, up 230% over the last year, the company’s valuation has actually come down over that period. As of 3/31/23, consensus was valuing the company at 61x forward EPS. This compares to today, where the company is being valued at 37x. While yes, we have never seen a company expand their market cap by so much so quickly, we have also never seen a company grow their fundamental earnings and cash generation so quickly (and which is actually expanding faster than valuation). While competitors are working to enter the GPU space, Nvidia has created a moat around their GPUs with their CUDA software offering. While we do expect the large cloud players to continue to move into the market, we think NVDA can continue to demand top market share. With leading edge technology, an increasing innovation cycle and strong cash generation, the company is well positioned for the increased adoption of accelerated computing and artificial intelligence (AI).
Nvidia Corp. (NVDA) was a top performer in the quarter gaining 82.5% in the period. While the company has had an impressive run, gaining 242% over the last year, the valuation has been supported by the impressive growth in Revenue (126%), EPS (392%) and free cash flow (610%) over the last year. The company has solidified its position in the GPU space supported by its proprietary software CUDA. While we expect competition to increase, we think NVDA can continue to maintain top market share. With leading edge technology, an increasing innovation cycle and strong cash generation, the company is well positioned for the increased adoption of artificial intelligence (AI).”
If you are looking for an AI stock that is as promising as Microsoft but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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