Artificial intelligence (AI) and semiconductor chips have been capturing investors’ collective imagination – and for good reason. Together, they’re driving the technology of the future. Semiconductor chips are ubiquitous in our digital age, and AI has in recent months begun transforming the way we communicate with our machines. The convergence of these two fields implies limitless possibilities.
For investors, this is particularly exciting. The Philadelphia Semiconductor Index, the PHLX, which tracks the chip sector through the performance of the 30 largest semiconductor makers, has gained approximately 39% so far this year.”
The PHLX is up for good reason. Semiconductors have been here for decades, and are found in pretty much everything in today’s digital world, but combined with AI, they’ll be driving tomorrow’s technology. Investors have picked up on this, and have made chip makers the go-to for AI stocks.
The question now is, how much more room do the AI chip stocks have to grow? We can consult the Street’s analysts – several top stock pros have been weighing in on AI and semiconductors, and their comments can shed more light on the sector. Let’s take a look at what they have to say, and which AI-related chip giants they’re recommending.
Nvidia Corporation (NVDA)
First up is Nvidia, a major name in the semiconductor industry, the eighth largest chip maker by revenue. Nvidia is a leader in the production of graphics processing units (GPUs), and has built its reputation on these high-end chips. The chips are capable of handling the computing power needs of several high-end, processing-intensive applications, including professional graphic design, high-end gaming — and AI. Demand for Nvidia’s GPUs, especially in the latter application, has powered the stock’s strong gains this year; for the year-to-date, NVDA shares are up approximately 190%.
Recent data show that Nvidia’s performance is standing on its AI products. OpenAI, the company that launched ChatGPT, has been using Nvidia’s GPUs since 2020 in training its AI units – to the tune of 20,000 chips. Looking ahead, OpenAI has indicated that it may need another 10,000 chips to maintain ChatGPT efficiency.
This is a firm foundation for Nvidia’s success, and the company’s strong position can be inferred from the solid beat it recorded in its recent Q1 financial results. This report showed a total top line revenue of $7.19 billion. While this was down 13% from the prior year, it beat the forecast by an impressive $670 million. The bottom line figure, a non-GAAP EPS of $1.09, was 17 cents per share better than had been anticipated.
Better yet, from an investor’s perspective, was Nvidia’s guidance. The company is predicting $11 billion in sales for its fiscal Q2, a massive increase from its previous guidance of $7.2 billion. Achieving this will translate to a 41% year-over-year increase in quarterly revenues.
This company’s strength in AI forms the basis for the upbeat comments by Morgan Stanley’s 5-star analyst Joseph Moore, who writes: “NVDA should trade at a premium to peers given the higher probability of upward revisions near term, but the multiple premium vs. those peers has actually narrowed meaningfully… Nonetheless, we do see continued growth in the NVDA data center business, in a multi-year trajectory that should be clearly above all other compute players on a composite basis, given there is no offsetting or cannibalized compute 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 consideration from investors looking for AI exposure, even if the current valuation construct and YTD stock return already reflects expectations that are higher than secondary or tertiary players.”
To this end, Moore puts an Overweight (i.e. Buy) rating on NVDA, which he has promoted to be his Top Pick. In Moore’s view, NVDA will hit $500 by this time next year, implying a gain of 18.5% from current levels. (To watch Moore’s track record, click here)
Overall, Nvidia gets a Strong Buy rating form the Wall Street analysts’ consensus, based on 33 recent reviews that break down to 30 Buys against just 3 Holds. The shares are trading for $422.09 and the $464.85 average price target suggest a modest 10% upside in the next 12 months. (See NVDA stock forecast)
Advanced Micro Devices (AMD)
AMD, by sales, is perennially one of the top ten largest chip making firms, and saw total revenues of $23.06 billion in the last four quarters (2Q22 through 1Q23). The company boasts a $188 billion market cap, and has a wide portfolio in the AI ecosystem, including high-performance chips and architecture.
AMD’s AI exposure incudes its Instinct GPU accelerators, the Alveo Adaptive accelerators, and the EPYC server processors, as well as several lines of chips, including its Ryzen AI mobile processors, and the Versal AI core adaptive SoCs. AMD’s AI chips and accelerators are found in a wide range of applications, from gaming to data centers to supercomputers, and provide the processing speed and capacity needed for generative AI.
By the numbers, the company’s recent performance was better than been expected. In the first quarter of this year, AMD showed $5.35 billion in total revenues. While that was down about 9% year-over-year, it beat the forecasts by $40 million. The company’s non-GAAP EPS bottom line of 60 cents per share also beat the forecast, by 4 cents over the estimates. On the negative side, the company’s Q2 revenue guidance of $5.3 billion was considered weak, and was below the $5.52 billion expectations.
The company’s AI portfolio provides important support for the firm. AMD is shifting its strategic focus to the emerging AI market, and is investing heavily in both networking and data center AI operations. Getting to specifics, AMD’s new Ryzen 7000 series includes AI processing capabilities, and the MI300 chips are designed for both high-performance computing and AI applications. The latter track will find support from the rapidly growing generative AI field.
These are the key points behind Baird analyst Tristan Gerra’s comments on AMD. Gerra, who holds 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 meaningful AI revenue starting in 4Q23 based on multiple hyperscaler engagements. AMD sees a >50% CAGR for data center AI acceleration by 2027, to a $150B+ TAM. While its ecosystem is not as mature as Nvidia, AMD is well positioned to be a key beneficiary of AI secular growth trends for the medium term, in our view.”
Based on the above, Gerra sets an Outperform (i.e. Buy) rating on AMD shares, and he gives the stock a price target of $170 to imply a 54.5% upside potential on the 12-month horizon. (To watch Gerra’s track record, click here)
Overall, the Street gives AMD a Moderate Buy consensus rating, based on 29 recent analyst reviews that include 21 Buys and 8 Holds. The stock’s current trading price is $110.01, and its $134.31 average price target suggests that 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 intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
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