Citigroup remains bullish on the semiconductor industry, as the bank believes that spending related to AI and memory will not slow down in the short term.
The semiconductor stock has experienced several weeks of volatility due to various factors, including concerns about delays, whether the AI spending frenzy will continue, and some weaker-than-expected performance. Nevertheless, Citigroup remains bullish on the industry, as the bank believes that spending related to AI and memory will not slow down in the short term.
In an investor report, analyst Christopher Danely wrote, "The fundamentals of the artificial intelligence and memory terminal markets (which account for about 30% of half of the demand) remain strong, artificial intelligence capital expenditures continue to increase, and DRAM prices have been better than expected in the third quarter of 2024."
Danely said that $Micron Technology (MU.US)$is the bank's top pick, as it is now time for "doubling down on investments," and he believes that the upward trend of DRAM prices should continue amid capacity reductions and upcoming quarters pricing "better than expected."
Buy Opportunity.
During the earnings season, the market's overall expectations for the industry decreased by 11%, largely due to $Intel (INTC.US)$'s weakness and concerns about $GlobalFoundries (GFS.US)$,$Microchip Technology (MCHP.US)$And.$NXP Semiconductors (NXPI.US)$inventory replenishment (excluding $Texas Instruments (TXN.US)$) not being as fast as some people had imagined.
Danely said that people's expectations for this earnings season are "very high" due to $PHLX Semiconductor Index (.SOX.US)$'s transaction price being nearly 70% higher than $S&P 500 Index (.SPX.US)$’s, which is the highest valuation since 2008.
Nevertheless, the industry still has some advantages, including those in artificial intelligence and memory, as well as markets such as PC, data center (excluding artificial intelligence), and mobile phones, among others.
Danely explained, "Based on comments from the supply chain, the fundamentals of the PC, data center, and mobile phone terminal markets (which account for a combined 60% of half of the demand) seem solid. In addition, semiconductor shipments are still far below terminal demand."
Danely reiterated his "buy" rating on $Advanced Micro Devices (AMD.US)$,$Broadcom (AVGO.US)$,$Analog Devices (ADI.US)$, Microchip Technology, and $NVIDIA (NVDA.US)$And.$KLA Corp (KLAC.US)$.
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