In this piece, we will take a look at AI and semiconductor stocks that fund managers are buying and selling according to Bank of America’s data.

The initial wave of artificial intelligence investing has shaken up the stock market. Suddenly, technology stocks are divided between those that have exposure to AI and those that don’t. The former category has soared to set records while the latter has been lackluster because of the state of sluggishness in the non-AI business world.

Within AI stocks that have outdone themselves, semiconductor stocks are a standout. Additionally, just as is the case with broader technology stocks, semiconductor stocks are also divided between those with AI and non-AI exposure. The best example of the former category is Wall Street’s top AI stock pick. This stock is of a firm that designs and sells GPUs used to process AI workloads. Its shares are up 845% since the 2023 start and have set multiple records since OpenAI’s Chat GPT became publicly available.

On the flip side, another semiconductor stock has floundered during the same period even though it’s one of the oldest and largest semiconductor companies in the world. This stock belongs to a firm that is also one of the only three companies in the world that can manufacture high-end semiconductors and it is the only one which is headquartered in the US. While the GPU designer’s shares have gained 845%, over the same time, this semiconductor stock is down 13.9%, and year to date the shares have bled an unbelievable 53.14%.

Therein lies the bifurcation between semiconductor stocks that is fueled by the artificial intelligence wave. However, these returns might belong to the first stage of AI stocks only, implying that other semiconductor companies could also see gains provided robust AI software demand and the ability of firms to monetize their products.  We covered a lot of such potential stocks as part of our coverage of Goldman Sachs’ Best Phase 2 AI Stocks: Top 24 High Conviction AI Stocks.

In this list, there were five semiconductor stocks. Four of these are semiconductor manufacturers while the remaining stock is the firm whose designs are the backbone of the modern-day smartphone industry. The stocks are ranked 19th, 16th, 14th, 8th, and 6th. Looking at their year-to-date performance, these stocks are up roughly 45%, 51.7%, 65.7%, 97.8%, and 122% year-to-date, respectively. Safe to say, the AI wave has been kind to these stocks. The next step in our brief analysis is to see what analysts believe the future holds for these firms. To do this, one particularly useful ratio is the forward price to earnings since it gauges the current price to analyst estimates of future earnings.

For these five phase two AI semiconductor stocks, the forward P/E ratios in respective orders are roughly 31.25, 50.51, 29.41, 25.19, and 99 times. The forward P/E ratio for global and US semiconductor stocks is 45.77 so most of these stocks are fairly valued. Consequently, this implies that in case of an AI correction that sees investor sentiment evaporate for any reason, these stocks might not be hit as hard as those speculating about an ‘AI bubble’ might worry, but if Wall Street finds more reasons to add to its AI euphoria, then their valuation might further bloom for more gains.

Shifting gears, the average forward P/E ratio for the semiconductor industry also leads us to wonder which stocks are driving this average value higher. After all, the six AI chip stocks we’ve covered above include some of the biggest companies in the world. However, high P/E ratios commonly belong to smaller companies that earn small profits but have a much higher share price. Two stocks that we’ve identified that have at least 2x the average forward P/E ratio are both unprofitable right now. The one with the higher forward P/E ratio of 196.08 ranks 20th on our list of Piper Sandler’s Top Technical Stock Picks: 20 Best Stocks while the second with a beefy ratio of 133.33 ranked 32nd on this list of AI stocks that were recently trending.

So, the next question to ask is, what makes these stocks so special that despite the fact that neither is currently profitable, investors have valued their shares more than 100 times over their projected earnings? Well, starting from the first stock with the higher P/E ratio, this firm is one of the few hardened integrated circuit manufacturers in the US. It makes radiation-resistant chips for the US military and its tools enable chip designs at various nodes. The second stock, which is up 49% year to date, is a specialty chip manufacturer that makes and sells silicon-based timing devices as an alternative to quartz-based products. These are used in applications such as edge computing and 5G networks – systems that are closer to end users and therefore must endure more strenuous working environments.

So, with the semiconductor space full of interesting stocks, let’s look at some stocks that fund managers are buying and selling according to BofA.

Our Methodology

To make our list of semiconductor stocks that fund managers love and hate according to BofA, we used its recent list of semiconductor stocks that were popular or losing popularity with fund managers. The list was divided into two sections based on expansion or decline in ownership.  Stocks within each category were ranked by the number of hedge funds that had bought the shares during Q2 2024. For an interesting exercise, you can also compare these stocks with those on our lists of Goldman Sachs’ List Of Stocks That Hedge & Mutual Funds Love & Hate: 28 Stocks On The Mutual and Hedge Funds Radar.

For these stocks, we also mentioned the number of hedge fund investors. 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).

16. ON Semiconductor Corporation (NASDAQ:ON)

Number of Hedge Fund Holders In Q2 2024: 45

Section: Losing Popularity

ON Semiconductor Corporation (NASDAQ:ON) is a US-based chip manufacturing company that makes and sells chips that are used in industrial, automotive, and other use cases. Looking at its income statement, it’s unsurprising that the stock is down 18% year to date. As of H1 2024, 53% of ON Semiconductor Corporation (NASDAQ:ON)’s $3.6 billion revenue came from automotive products. These products include silicon carbide chips that are used to manage power by electric vehicles. Consequently, as EV demand has struggled in today’s era of high interest rates and economic turmoil, ON Semiconductor Corporation (NASDAQ:ON) has struggled due to its relative lack of diversification. The firm’s industrial division’s revenue also dropped by 21% in H1 as industrial activity remained weak all over. To manage the turbulence, ON Semiconductor Corporation (NASDAQ:ON) is currently on a downsizing spree through which it aims to shift some chip manufacturing to contract manufacturers and reduce fixed costs and capital expenditure.

Artisan Partners mentioned ON Semiconductor Corporation (NASDAQ:ON) in its Q1 2024 investor letter. Here is what the fund said:

“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.”

15. Microchip Technology Incorporated (NASDAQ:MCHP)

Number of Hedge Fund Holders In Q2 2024: 46

Section: Losing Popularity

Microchip Technology Incorporated (NASDAQ:MCHP) is one of the more unique computer hardware companies in the stock market. This is because it has a wide exposure to the data center market, but has nevertheless struggled on the stock market this year as the shares are down 12.9% year to date. Microchip Technology Incorporated (NASDAQ:MCHP) targets the data center industry via products such as signal processors and microcontrollers. These are used for connectivity and the firm’s Total System Solution also offers a one-stop shop for embedded systems design. However, Microchip Technology Incorporated (NASDAQ:MCHP) depends to a large extent on the non-AI data center industry for its revenue. Consequently, as this sector has slowed spending in the high interest rate environment, the shares have struggled. AI data center build-out is freshly picking up the pace, and as Microchip Technology Incorporated (NASDAQ:MCHP) is already dealing with an inventory glut, it might take more time before revenue stabilizes.

Aristotle Atlantic Partners mentioned Microchip Technology Incorporated (NASDAQ:MCHP) in its Q2 2024 investor letter. Here is what the firm said:

“Microchip develops, manufactures and sells smart, connected and secure embedded control solutions used by its customers for a wide variety of applications. With over 30 years of technology leadership, Microchip’s broad product portfolio is a Total System Solution for its customers that can provide a large portion of the silicon requirements in their applications. Total System Solution is a combination of hardware, software and services that helps customers increase their revenue, reduce their costs and manage their risks compared to other solutions. Microchip’s synergistic product portfolio empowers disruptive growth trends, including 5G, data centers, sustainability, Internet of Things and edge computing, advanced driver assist systems and autonomous driving, and electric vehicles in key end markets such as automotive, aerospace and defense, communications, consumer appliances, data centers and computing, and industrial.

We believe Microchip’s Total System Solution will continue to support industry share gains and margin expansion as end- market demand for industrial and Internet of Things compute needs begins to recover off current lows. Management has accelerated the drawdown of high customer inventory levels by shutting down manufacturing facilities, and current industry data as well as commentary from peers indicates that overall end demand is seeing early signs of improvement. The company has a demonstrated track record of margin expansion, and we expect to see gross margins trough at the current level and, through internal efficiencies and pricing initiatives for its Total System Solution, expand and drive increasing operating margins and higher levels of free cash flow.”