Will Chip Stocks Maintain Their Rally? Insights From Top Banks

Analysts Notebook joined discussion · Jun 4 05:16

Leading financial institutions, including Bank of America (BofA), UBS Group, and JPMorgan, forecast sustained growth for the semiconductor industry, with a peak not expected until mid-2026. Analysts attribute the robust industry performance to technological advancements and diversification, predicting a bullish trend for semiconductor stocks based on positive market dynamics and earnings potential.

BofA: Chip Stocks Won't Peak Until Mid-2026

$Bank of America(BAC.US)$ predicts that the semiconductor industry will continue to thrive until mid-2026, propelled by artificial intelligence. The firm identifies three main areas for growth: cloud computing, automotive, and increasing manufacturing complexity. Top stock picks from Bank of America include $NVIDIA(NVDA.US)$, $Broadcom(AVGO.US)$, $NXP Semiconductors(NXPI.US)$, and $KLA Corp(KLAC.US)$, with significant price objectives set for each.

Despite potential short-term setbacks, the chip industry's usual pattern of 10 quarters of growth after a downturn suggests strong performance until at least mid-2026. Additionally, the $PHLX Semiconductor Index(.SOX.US)$, which tracks semiconductors, has already outperformed benchmark indices significantly.

Bank of America is optimistic about double-digit annual sales growth starting in 2025, following an inventory correction. Nvidia and Broadcom are highlighted for their strong position in cloud computing, while NXP Semiconductors is favored due to the increasing role of chips in the automotive industry. KLA Corporation stands to benefit from the complexity of semiconductor manufacturing.

UBS: Chip Stocks Remain Crowded

$UBS Group(UBS.US)$ analysts report that although semiconductor stocks are still popular with investors, crowding has slightly decreased from the previous month. NVIDIA, $Qualcomm(QCOM.US)$, and $Lam Research(LRCX.US)$ are currently the most crowded stocks according to UBS, while $Microchip Technology(MCHP.US)$ and $ON Semiconductor(ON.US)$ are the least crowded, with $United Microelectronics(UMC.US)$ and $INFINEON TECHNOLOGIES AG(IFNNF.US)$ being even less crowded globally.

$Advanced Micro Devices(AMD.US)$, once the most controversial, is now considered about Neutral in crowding, which is seen as positive as its MI300 revenue is expected to grow in the second half. Similarly, Broadcom's crowding has significantly decreased and is also rated as Neutral.

UBS also notes growing interest in the analog sector, yet $Texas Instruments(TXN.US)$, despite being upgraded months earlier, remains among the least crowded stocks.

JPMorgan: Chip Stocks Poised for Further Gains

According to JPMorgan analysts, the semiconductor industry is poised for continued growth, particularly due to the rising demand in the AI sector. They anticipate that the industry, encompassing semiconductor, semiconductor capital equipment (semicap), and electronic design automation (EDA) segments, will extend its trend of outperforming the market for several years.

The bank's research points to robust demand in the custom chip (ASIC) market, fueled by AI advancements, predicting a market size of $20-30 billion with a 20% growth rate. Broadcom and $Marvell Technology(MRVL.US)$ are expected to lead this area, while companies like $Arm Holdings(ARM.US)$ and $Astera Labs(ALAB.US)$ are also gaining momentum in AI data center markets.

JPMorgan attributes the strong performance of semiconductor stocks to the industry's critical contribution to technological innovation, new growth drivers such as cloud data centers, EVs, IoT, and AI/deep learning, as well as reduced market cyclicality through diversification and controlled supply growth. This shift has led to a focus on profitability, free cash flow, and returning capital to shareholders.

Despite predicting an 8% revenue decline in 2023, JPMorgan forecasts a 6-8% revenue growth for the semiconductor industry in 2024. The firm remains bullish on semiconductor stocks, expecting that favorable supply and demand dynamics, along with positive earnings revisions, will propel the market upward in 2024 and 2025.

$S&P 500 Index(.SPX.US)$ $NASDAQ 100 Index(.NDX.US)$ $Nasdaq Composite Index(.IXIC.US)$ $Dow Jones Industrial Average(.DJI.US)$

Source: Investing.com, Yahoo Finance

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