Artificial intelligence (AI) and semiconductor chips are capturing the collective imagination of investors — and with good reason. Together they drive the technology of the future. Semiconductor chips are ubiquitous in our digital age and in recent months AI has started to change the way we communicate with our machines. The convergence of these two areas implies unlimited possibilities.
This is particularly exciting for investors. The Philadelphia Semiconductor Index, the PHLX, which tracks the chip sector based on the performance of the 30 largest semiconductor manufacturers, is up about 39% so far this year.”
The PHLX is online for a reason. Semiconductors have been around for decades and can be found in pretty much everything in today's digital world, but combined with AI they will power tomorrow's technology. Investors have recognized this and made chipmakers the go-to place for AI stocks.
The question now is, how much room for growth do AI chip stocks have? We can consult the Street analysts – several top stock professionals have commented on AI and semiconductors and their comments may shed more light on the sector. Let's take a look at what they have to say and which AI-related chip giants they recommend.
Nvidia Corporation (NVDA)
First up is Nvidia, a big name in the semiconductor industry and the eighth largest chipmaker by revenue. Nvidia is a leader in the manufacture of graphics processing units (GPUs) and has built its reputation on these high-end chips. The chips are capable of handling the computing power demands of several high-end, compute-intensive applications, including professional graphic design, high-end gaming – and AI. Demand for Nvidia's GPUs, particularly in the latter application, has been the engine behind the stock's strong gains this year; Year-to-date, NVDA shares are up about 190%.
Recent data shows that Nvidia's performance stands on its AI products. OpenAI, the company that launched ChatGPT, has been using Nvidia's GPUs to train its AI units since 2020 – a total of 20,000 chips. Looking ahead, OpenAI has hinted that it may need another 10,000 chips to maintain ChatGPT efficiency.
This is a solid foundation for Nvidia's success, and the company's strong position can be deduced from the solid balance sheet it reported in its recent first-quarter financial results. This report showed total sales of $7.19 billion. While that was down 13% year over year, it topped guidance by an impressive $670 million. Bottom line, non-GAAP EPS of $1.09 was 17 cents a share above expectations.
Nvidia's forecast was even better from an investor's perspective. The company is forecasting revenue of $11 billion for the second fiscal quarter, a huge increase from the previous forecast of $7.2 billion. If achieved, it will result in a 41% year-over-year increase in quarterly revenue.
This company's strength in AI underpins optimistic comments from Morgan Stanley's 5-star analyst Joseph Moore, who writes, “NVDA should trade at a premium versus peers given the higher likelihood of near-term upside corrections, but the multiple premium versus …Those competitors have indeed slimmed down significantly…Nonetheless, we see continued growth in the NVDA data center business over a multi-year trajectory that, on a composite basis, should be well above all other computing vendors, barring a compensating or cannibalized computing business outside of the AI business.
“As a result,” the analyst added, “we see NVDA as the cleanest story in AI hardware and believe it continues to deserve more attention from investors looking for AI exposure, even as the current valuation construct and YTD Shareholders' return already reflecting expectations.” That's higher than for secondary or tertiary players.”
To that end, Moore gives NVDA an Overweight (ie, Buy) rating, which he has declared his top pick. According to Moore, the NVDA will hit $500 by this time next year, up 18.5% from current levels. (To see Moore's track record, Click here)
Overall, Wall Street analyst consensus gives Nvidia a Buy Strong rating based on 33 recent ratings, broken down into 30 buys versus just 3 holds ratings. Shares trade for $422.09 and the average price target of $464.85 suggests a modest 10% upside potential over the next 12 months. (See NVDA Stock Forecast)
modern micro devices (AMD)
AMD has historically ranked among the top 10 chipmakers by revenue, reporting total revenue of $23.06 billion for the past four quarters (Q2 2022 to Q1 2023). The company has a market cap of $188 billion and a broad portfolio in the AI ecosystem, including high-performance chips and architecture.
AMD's AI footprint includes its Instinct GPU accelerators, Alveo Adaptive accelerators, and EPYC server processors, as well as multiple chip lines including its Ryzen AI mobile processors and Versal AI Core adaptive SoCs. AMD's AI chips and accelerators can be found in a variety of applications, from games to data centers to supercomputers, and provide the processing speed and capacity needed for generative AI.
According to the numbers, the company's recent performance was better than expected. In the first quarter of this year, AMD achieved total sales of 5.35 billion US dollars. While that was down about 9% year over year, it topped guidance by $40 million. The company's non-GAAP EPS of 60 cents per share also beat guidance, up 4 cents over estimates. On the negative side, the company's second-quarter revenue guidance of $5.3 billion was seen as weak, falling short of expectations of $5.52 billion.
The company's AI portfolio provides important support to the company. AMD shifts its strategic focus to the emerging AI market and invests heavily in network and data center AI operations. Getting down to the nitty gritty, AMD's new Ryzen 7000 series has AI processing capabilities, and the MI300 chips are designed for both high-performance computing and AI applications. The latter path is supported by the fast-growing field of generative AI.
These are the key points behind Baird analyst Tristan Gerra's comments on AMD. Gerra, who received a 5-star rating from TipRanks, says of the company: “Mi300x claims best-in-class TCO performance for inference applications and management reiterated its expectation for significant AI sales as of Q4 23, based on multiple hyperscaler engagements.” AMD projects that AI acceleration in the data center will achieve a compound annual growth rate (CAGR) of more than 50% to a TAM of over $150 billion by 2027. While its ecosystem is not as mature as Nvidia's, we believe AMD is well positioned to be a key beneficiary of long-term AI growth trends over the medium term.”
Based on the above, Gerra assigns an Outperform (ie, Buy) rating to AMD stock and gives the stock a price target of $170, which implies a 54.5% upside potential over a 12-month period. (To see Gerra's track record, Click here)
Overall, Street AMD gives AMD a moderate buy consensus rating based on 29 recent analyst ratings, which include 21 buy and 8 hold ratings. The stock's current trading price is $110.01, and its average price target of $134.31 suggests it will appreciate by 22% in the year ahead. (See AMD 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.