Semiconductor stocks rallied sharply in 2023, with the sector among the best-performing S&P 500 sector classes. Against the backdrop, an analyst said on Tuesday he views the group as expensive on the 2024 estimates but remains positive about names levered to the “2nd Wave of AI.”
What Happened: Barclays analyst Tom O’Malley said in a note he remained below the 2024 consensus estimates for nearly two-thirds of his coverage universe. Investor focus, however, has shifted to 2025, the analyst said, adding that he expects robust positive inflection for most end markets.
KeyBanc Capital Markets analyst John Vinh said in a note on Tuesday that most end markets, except those for non-AI servers and Android smartphones, remained weak in the fourth quarter.
O’Malley’s optimism regarding the 2025 outlook is not across the board. “Even factoring in a strong growth year in ’25, there isn’t a ton of low-hanging fruit at these levels,” he said. “We are picking our spots into next year and prefer names levered to the ‘2nd Wave of AI.'”
AMD To Take Lead: Barclays sees Advanced Micro Devices exiting 2024 with an AI revenue run-rate of $4 billion, which will likely increase to more than $7 billion in 2025. “We think the ramp is driven by multiple
customers across hyperscale and Enterprise and more 2H loaded,” analyst O’Malley said.
Citing channel checks, the analyst said the MI300 AI accelerator has received stronger feedback. The desire to overcome a software barrier from Nvidia Corp. NVDA could serve as a handicap for AMD adoptions, the analyst said. ‘We are by no means discounting the lead that NVDA has but we think the desire to have a second source will overwhelm difficulties for the software ecosystem,” he added.
See Also: Best Semiconductor Stocks
Barclays’ Preferred Names: Barclays listed the following chip companies as the ones it likes, heading into 2024 and the next year.
- AMD: Overweight rating maintained and price target upped from $120 to $200
- Semiconductor equipment manufacturer Camtek Ltd. CAMT: The analyst upgraded the stock from Equal Weight to Overweight and lifted the price target from $65 to $82.
- Coherent Corp. COHR: The analyst upgraded the stock from Equal Weight to Overweight and lifted the price target from $38 to $60.
- Marvell Technology, Inc. MRVL: Overweight rating maintained and price target nudged up from $70 to $75.
- NXP Semiconductor N.V. NXPI: O’Malley upgraded the stock from Equal Weight to Overweight and increased the price target from $200 to $260.
- Western Digital Corporation WDC: The analyst upgraded the stock from Equal Weight to Overweight and raised the price target from $45 to $65.
Explaining his optimism regarding Coherent and Marvell, the analyst said interconnection device makers will likely be the biggest beneficiaries of AI, and these two stocks could gain from the “2nd wave of AI.” Traditional server interconnect represented about 10% of the bill-of-materials and about 30% in AI with higher speeds and more “east-west” connections between accelerators, he said.
Camtek will likely reap the reward of high-bandwidth memory and advanced packing needed for AI chips, Barclays said. “The company has visibility into >50% of their forecast next year and we see the name continuing to work even after a robust ’24,” it said.
O’Malley sees the return of flash and near-line hard-disk drives to benefit Western Digital. “We think HDDs are a good neighborhood to play in over the next 2-years,” he said.
Among auto chip suppliers, the analyst said NXP is “well positioned,” as it is at the lowest of the prior peak, and it undergrew during the pandemic. “Using industry advertised growth rates of above 10% shows them as the best relative vs. Street estimates,” he said.
The iShares Semiconductor ETF SOXX ended Monday’s session up 1.42% at $565.29, according to Benzinga Pro data.
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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