AI boom isn’t fully priced into these two semicap stocks, says Wall Street’s top analyst

Trends come and go, but the recent trend to take Wall Street by storm is proving to be quite persistent. The AI ​​hype has been all the rage this year, and stocks exposed to generative AI and LLMs (large language models) have benefited.

So much so that the top Wall Street analyst thinks it's time to change their minds on many of them. In examining the semi-cap space, Needham analyst Quinn Bolton is faced with a plethora of names that have high valuations and little room to maneuver from here.

“As SemiCap stocks have risen significantly on the back of AI hype, but AI is unlikely to lead to a significant increase in WFE spending, we believe many SemiCap stocks are overbought in the near term,” said the 5-star analyst. “In our view, investors need to look to 2025 and 2026 and the next WFE up cycle to determine if there is enough earning power in the upleg to justify buying the shares at current levels.”

With this in mind, Bolton has downgraded the ratings of several SemiCap stocks. However, not all SemiCap stocks are perfectly valued. Bolton, who has a 72% success rate on his stock recommendations and an average return of 39%, is currently the top analyst on The Street, so it's fair to say he has a flair for the game. And he believes that two SemiCap stocks in particular are still ripe for picks. Let's take a closer look.

ACM Research (ACMR)

The first stock we look at is ACM Research, a leading provider of advanced technology and manufacturing tools that the chip industry needs to manufacture silicon wafers. This is a deeper level of an important industry, and ACM Research has an array of tools for wet machining, electroplating, stress-free polishing, and other key chip fabrication processes. Put simply, the companies that make the chips that power AI systems couldn't even get started without ACM's tools.

In addition to high-tech tools, ACM Research also offers solid customer support that is maintained throughout the life of the company's device products. ACM Research helps customers install its machines and then works with them to optimize systems, prevent problems, and eliminate chip production bottlenecks. The company's support activities include software, apps, and parts and service, regardless of the customer's location.

Demand for silicon semiconductor chips has been beneficial to ACM Research, which can be clearly seen in the company's latest quarterly report for Q1 2023. Overall, ACMR reported revenue of $74.26 million, up 76% year over year and beating guidance by more than $5.5 million. The company's net income, which came in at 15 cents per share on non-GAAP measures, was 16 cents per share ahead of expectations. For fiscal year 2023, the company maintained its revenue guidance and forecast revenue in the range of $515 million to $585 million. The consensus estimate was $540.58 million.

Quinn Bolton likes this company's record, as he noted in his recent stock review. He formulated his stance on ACMR as follows: “Being the fastest growing SemiCap stock to our coverage, with approximately $400 million in cash and very little debt, we believe a 12.5x multiple is more than fair.” Due to its heavy exposure to China, the stock is currently receiving little attention from investors. However, we believe this ACMR sentiment will change over time as its growth proves too difficult to ignore.”

Looking ahead, Bolton continues to rate ACMR as a “buy” with a price target of $18 implying a 1-year upside potential of 59%.

Like Bolton, other analysts are taking a bullish approach. ACMR's Strong Buy consensus rating is broken down into 5 Buy and zero Hold or Sell. Given the median price target of $21.30, the upside potential is 86%. (See ACMR Stock Forecast)

Cohu, Inc. (COHU)

The second of Bolton's favorites we're looking at is Cohu, a leading manufacturer of test and inspection equipment for chip assembly lines. The products offered by Cohu play a crucial role in ensuring careful quality control throughout the chip manufacturing process.

Cohu has established itself as a major player in the chip test niche with a broad portfolio of test equipment and services tailored to the needs of backend semiconductor manufacturers. The company describes itself as a “one-stop shop” for a wide range of inspection solutions, including handling equipment, thermal subsystems, and visual inspection and metrology.

The company doesn't stop at chipmakers, however. Cohu has solidified its presence in the high-tech test business by expanding its offering to include test and quality control equipment for IoT, industrial and medical, mobility, automotive, computing and networking, and consumer product applications. The company has come a long way since its inception in 1947.

However, Cohu's latest financial statement for the first quarter of 23 showed mixed results. The company's revenue fell 9.3% year over year to $179.37 million and missed guidance by $0.92 million. However, Cohu's non-GAAP gross margin increased to 48.2% in Q1 2023 from 46.1% in Q1 2022. This contributed to earnings performance as adj. Earnings per share were $0.56, beating guidance by $0.02.

The positive metrics caught Bolton's attention, and he wrote of the stock, “Cohus NG GM is showing resilience even at a lower level of sales and we continue to believe that a strong GM will help keep the shares near current levels.” Robust recurring revenue, expanded production in the Philippines, higher handler margins and a mix enable strong GM. The increased costs impacted GM by 29 basis points and will continue into 2023.”

“Notably,” added the top analyst, “COHU was awarded a multi-unit SiC contract valued at $5 million for test automation and inspection.” % of sales will account for. However, we believe that the short- and long-term opportunities of COHU in SiC are currently underestimated. We expect COHU's SiC sales to grow faster than sales in the coming years.”

With this bullish stance, Bolton has a Buy rating on COHU stock and a price target of $52, suggesting the company has 29% upside potential over a one-year horizon.

Overall, the Wall Street consensus on COHU is a strong Buy based on 4 analyst ratings including 3 Buy and 1 Hold. Shares sell for $40.12, and the average price target of $42.75 implies a 6.5% one-year upside potential for the stock. (See COHU Stock Forecast)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important to do your own analysis before investing.

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