Which Small And Mid-Cap Chip Stocks Are Set For Big Gains?

On Tuesday, Bank of America Securities (BofA) analyst Vivek Arya highlighted five small and mid-cap (SMid Cap) stocks within his coverage, projecting they could outperform the SOX index over the next year. Notably, the SOX has already seen a strong 5% year-to-date gain compared to the S&P 500’s 2%.

These selected companies, including Allegro MicroSystems, Inc. ALGM, Credo Technology Group Holding Ltd.CRDO, Nova Ltd. NVMI, Coherent Corp. COHR, and MACOM Technology Solutions Holdings, Inc. MTSI, are strategically positioned within the sector’s most investable themes.

Arya noted these companies are at the forefront of the sector’s most investable themes, exhibiting high growth or capturing market share within large, attractive total addressable markets (TAMs). He added that they’re also boosting EPS leverage through expanding margins.

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Among these top picks, BofA has raised price forecasts for two companies.

MACOM Technology Solutions Holdings

Arya increased his price forecast for MTSI to $160 (up from $140). He justified this revision with a higher 39x forward price-to-earnings (P/E) multiple for the calendar year 2026 (previously 34x), citing strong momentum in AI and defense sectors.

Nova Ltd.

He also raised his price forecast for NVMI to $270 from $250. This revised forecast is based on a higher 29x calendar 2026 estimated price-to-earnings (P/E) multiple (up from 26x), driven by robust demand for leading-edge Wafer Fabrication Equipment (WFE).

Allegro MicroSystems, Inc.

Among the other featured SMid Cap picks, ALGM, a magnetic sensor leader, is poised for a significant cyclical upturn. As noted in BofA’s June 16 initiation report, key drivers include auto sales returning to year-over-year growth in the June quarter following significant under-shipment relative to demand in the sensor category.

The content-rich e-mobility mix within auto sales is also expected to expand to the high 50% range by the second half of 2025 (from low-50%), and gross margins are projected to recover to 50% by the first half of 2026 (currently ~45.6%), with a full long-term recovery to 58% driven by increased volumes.

Coupled with disciplined operational expenditure, BofA forecasts a 46% calendar year 2024-2027 pro forma EPS Compound Annual Growth Rate (CAGR), more than three times the semiconductor peer average, justifying a premium P/E.

Credo Technology Group Holding Ltd.

CRDO is highlighted as a key Active Electrical Cables (AEC) supplier enabling larger AI clusters. Arya particularly favors Credo’s leadership in the fast-growing AEC market, where the TAM could double over the next two years.

He pointed to two new hyperscaler ramps scheduled for the fiscal second half of 2026, which will complement three existing customers and help reduce customer concentration.

Credo’s product portfolio is also meaningfully expanding in calendar 2026 to encompass Digital Signal Processors (DSPs), PCIe offerings, and line cards. A potential +67% EPS CAGR from calendar 2024-2027 is expected as opex growth remains below 50% of sales growth while GMs remain resilient.

Coherent Corp.

Finally, Coherent Corp COHR, with its broad optics portfolio, is seen as playing a critical role in AI trends. Despite a wide year-to-date performance spread with Lumentum Holdings LITE (+6% YTD vs. COHR -15% YTD), Arya maintains a Buy rating on Coherent.

This is due to its leadership across Electro-absorption Modulated Laser, Vertical Cavity Surface Emitting Laser, and Silicon Photonics technologies, which bolster its positioning for upcoming 1.6T ramps and share gains within a $32 billion data center serviceable addressable market.

Cost reductions and restructuring efforts are anticipated to drive gross margins to over 42% long-term from the current high-30s. Furthermore, U.S. fab investments could increase Indium Phosphide capacity four to five times, providing a significant competitive advantage.

Arya estimates Coherent’s long-term EPS power to be between $7.9 and $9.8, approximately 50% above Street estimates for fiscal 2028, where the implied valuation is only ~10x P/E, remaining below its ~15x historical median P/E.

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