Six semiconductor stocks to buy as artificial intelligence (AI) initiatives expand have the potential to boost their share prices toward the sky.
The six semiconductor stocks to buy as artificial intelligence becomes the next technology breakthrough have participated powerfully in the industry’s resurgence this year after a 30% plunge in 2022. The first half of 2023 has seen renewed enthusiasm about technology’s potential to catalyze progress in business and society, according to a new report by McKinsey & Co.
“Generative AI deserves much of the credit for ushering in this revival, but it stands as just one of many advances on the horizon that could drive sustainable, inclusive growth and solve complex global challenges,” according to McKinsey & Co.
Six Semiconductor Stocks to Buy as Artificial Intelligence Advances Go to the Sky
For investors looking to play the field rather than buy individual stocks, the “best” exchange-traded fund (ETF) available is Invesco Dynamic Semiconductors (PSI), said Bob Carlson, a pension fund chairman who heads the Retirement Watch investment newsletter. The fund tracks the Dynamic Semiconductor Intellidex Index, seeking price momentum, earnings momentum, quality, management action and value.
Paul Dykewicz interviews Bob Carlson, head of Retirement Watch.
The turnover ratio of the fund is more than 100% annually, Carlson said. The ETF typically holds 30 stocks and changes the allocation among them based on the factors listed above. Recently, 47% of the fund was in its 10 largest positions.
The top holdings in the fund recently were NVIDIA (NASDAQ: NVDA), Broadcom (NASDAQ: AVGO), Lam Research (NASDAQ: LRCX), Applied Materials (NASDAQ: AMAT) and Micron Technology Inc. (NASDAQ: MU). As far as the fund’s performance, PSI is up 7.20% in the last four weeks, 28.95% over three months, 43.55% for the year to date and 29.09% over 12 months.
Six Semiconductor Stocks to Buy: AI Advances Toward the Sky
Initial results of second-quarter 2023 cloud capital expenditures (capex) are showing investments in AI appear to be offset by slowing traditional computer spending, according to BofA Global Research. For example, Microsoft’s (NASDAQ: MSFT) capex outperformance of $8.9 billion topped a forecast of $7.8 billion, while Google, a key business of Alphabet (NASDAQ: GOOGL), attained a capex of $6.9 billion, but fell short of an expected $8.0 billion. Meta Platform Inc.’s (NASDAQ: META) $6.2 billion capex dipped below a projected $7.9 billion.
“All 3 hyperscalers highlighted material portions of capex supporting AI projects,” BofA technology analyst Vivek Arya wrote in a recent research note. Meta/Google noted capex cuts from delays of data center construction projects, moderation in build-out of office facilities (Google) and cost savings centered on non-AI servers (Meta), he added.
“We continue to see benefits for semis as AI investment ramps,” Arya wrote.
However, it will be prudent for “hyperscalers” to show profitability from AI projects, potentially leading to cautious data center capex spending patterns, Arya wrote in his research note.
AI server CPU demand is offset by slowing non-AI spending on central processing units (CPUs) already included in all non-AI servers, according to Arya’s research note. Rising investment in graphics processing unit-based cloud service providers should help accelerate generative AI adoption, showcasing the value of having an end-to-end AI platform, rather than just a cheaper graphics processing unit (GPU), further raising AI barriers for typical CPU vendors, he added.
Six Semiconductor Stocks to Buy: Broadcom Inc. (AVGO)
One of the six semiconductor stocks to buy is San Jose, California-based Broadcom, with a $1,050 price objective that falls within the stock’s long-term 10x-30x range, given double-digit-percentage earnings per share (EPS) growth and best-in-semis profitability, free cash flow (FCF) generation and returns. Free cash flow represents money a company has left over after paying its operating expenses and capital expenditures.
Risks to Broadcom achieving the price objective include sensitivity to U.S./China trade relations, high exposure to Apple (NASDAQ: AAPL), networking, smartphone, storage and enterprise software market challenges, and a recent strategy of moving into non-core software businesses that pose execution issues.
Chart courtesy of www.stockcharts.com
Six Semiconductor Stocks to Buy: Cadence (CDNS)
BofA’s $285 price objective on San Jose, California-based Cadence Design Systems Inc. (NASDAQ: CDNS) is within the stock’s historical 22x-52x trading range. The valuation is warranted due to the strategic importance of exploratory data analysis (EDA) in an increasingly fragmented global electronics supply chain, BofA wrote.
Risks to Cadence attaining the price target BofA projected include: share loss in existing markets to primary competitors, a broadened economic downturn dampening research and development (R&D) spending and EDA tools and services expenditures, escalation of the U.S.-China trade war limiting the company’s sales to key customers and semiconductor industry consolidation. Another risk is Cadence venturing into an adjacent system analysis market may fail to meaningfully accelerate revenue growth, with incremental investments suppressing margin expansion.
Chart courtesy of www.stockcharts.com
Six Semiconductor Stocks to Buy: Camtek (CAMT)
Israel-based Camtek (NASDAQ: CAMT) received a $50 price objective from BofA, falling within the company’s long-term 8x-40x range. Prospects for outperforming BofA’s price objective could be enhanced by accelerated share gains vs. key competitor Onto Innovations, stronger-than-expected electronics demand that may tighten semiconductor capacity further to drive increased semiconductor equipment sales and the potential industry consolidation that may turn it into an acquisition target.
Risks to Camtek fulfilling its price target include a weaker-than-expected capital spending cycle, heightened competition with large competitors like KLA Corp. and the historically cyclical nature of semiconductor capital spending, particularly on packaging equipment.
Chart courtesy of www.stockcharts.com
Six Semiconductor Stocks to Buy: Marvell Technology Group Ltd. (MRVL)
Marvell Technology Group Ltd. (NASDAQ: MRVL), of Santa Clara, California, received an $80 price objective from BofA. The valuation is “well-supported” by the company’s 15-20% longer-term compounded annual earnings per share (EPS) growth potential, within the normal 1x-2x range for high growth semiconductor peers.
Risks to Marvell reaching that price target include integration of businesses from its recent deals, financial hurdles related to going to net debt from net cash position, as well as achieving expected cost synergies in a timely manner. Additional risks include its cyclical industry, possible slowdown in legacy hard disk drive, infrastructure spending and storage assets, along with competition from larger, well-resourced rivals, BofA added.
Chart courtesy of www.stockcharts.com
Six Semiconductor Stocks to Buy: NVIDIA Corporation (NVDA)
Santa Clara, California-based NVIDIA’s $550 price objective set by BofA is within the semiconductor company’s historical 26x-69x forward year price-to-earnings range, the investment firm wrote. The valuation is justified, given stronger growth opportunities ahead as gaming cycle troughs and data center demand potentially face strong, long-term demand dynamics, BofA wrote.
Risks to NVIDIA meeting the price objective set by BofA are weakness in the consumer-driven gaming market, competition with Intel (NASDAQ: INTC), AMD, Broadcom and Marvell, internal cloud projects and other companies in accelerated computing markets, and potential restrictions from the U.S. government on shipments of advanced AI technologies to overseas customers. Other risks include lumpy and unpredictable sales in new enterprise, data center and auto markets, potential for decelerating capital returns, possible automobile sale slowdowns until advanced driver-assist systems become more meaningful and elevated operational expense growth.
Chart courtesy of www.stockcharts.com
Six Semiconductor Stocks to Buy: Synopsys (SNPS)
The sixth semiconductor stock tied to AI that BofA is recommending as a buy is Mountain View, California-based Synopsys (NASDAQ: SNPS), which netted a $510 price objective from the investment firm. The valuation is within the company’s historical trading range of 19x-49x, BofA wrote.
Risks to attaining the price objective set by BofA include variability in IP/hardware sales creating issues in timing of revenue recognition, as well as competitors developing unique software capabilities that could displace SNPS from serving its core customers. Another threat is heightened geopolitical tensions possibly restricting Synopsys from supplying firms in China with EDA technology.
To outperform the price target BofA set, Synopsys could boost its share of existing markets vs primary competitors and benefit from increased government investment in semiconductor R&D as nations develop internal ecosystems. Two additional reasons why Synopsys may beat the price target BofA set for it are material M&A that enable consistent margin expansion or further accelerate sales compound annual growth rate (CAGR) and faster-than-expected cost improvements driving higher operating margins.
Chart courtesy of www.stockcharts.com
Political Risk Increases from Russia’s Escalating Attacks Against Ukraine
Political risk is growing after drone strikes hit both Ukraine and Russia this week. Russian forces struck residential areas and a hospital in Kharkiv, Ukraine, reportedly killing a doctor and injuring five medical workers. In turn, a government ministry building in Moscow was damaged from a drone attack likely to have come from those sympathetic to Ukraine’s plight.
A meeting is planned in Saudi Arabia next week between diplomatic leaders to discuss potential terms for peace, but the talks will not include officials from Russia. Despite heavy losses of soldiers and no end in sight from the bloodshed begun when Russia invaded Ukraine in February 2022, a resolution seems unlikely anytime soon.
With Russia disrupting grain exports from Ukraine and endangering the food supply to countries in Africa and elsewhere, the fallout from the protracted war is immense. Political risk is rising amid an intensifying conflict as Ukrainian forces attempt a counteroffensive aimed at pushing Russian forces back to their own land.
The six semiconductor stocks to buy stand to benefit from the growing interest and demand for artificial intelligence advances. Despite the political risk, investors have ways to profit from the important technology trend.
