Semiconductors are an integral part of the global economy. Chips are the foundation for computers, smartphones, cars, refrigerators, and other essentials. Corporations in this sector have experienced a lift in recent months due to the growing demand for artificial intelligence chips. All of which is great news for semiconductor stocks.
AI chips require more computing power than traditional chips. It’s a new frontier that is still in its early innings. Several semiconductor stocks have established themselves as leaders within the industry, but there are also a few under-the-radar picks to consider. Here are some of Wall Street’s favorite picks.
Broadcom (AVGO)
The semiconductor and software giant has an innovative AI chip and is growing at a robust pace. Shares have more than doubled over the past year and have 19 “Buy” ratings from Wall Street analysts. The other two analysts rated the stock as a “Hold.” The highest price target of $1,550 suggests a 26.8% upside from the current price.
Broadcom (NASDAQ:AVGO) combines high appreciation with significant dividend growth. The firm regularly raises its dividend by at least 10% per year which explains a 1.70% yield despite an impressive 339% gain over the past five years.
Broadcom closed out fiscal 2023 by announcing a 14% dividend hike. It’s the 13th consecutive year of a dividend increase. Net income and revenue both had growth rates in the single digits year-over-year. The company converted 49% of its revenue into free cash flow.
Broadcom offers good value, trading at 37x earnings with compelling growth prospects. All thanks to artificial intelligence tailwinds, its VMware acquisition, and other factors.
Synopsys (SNPS)
Synopsys (NASDAQ:SNPS) has exhibited similar gains as Broadcom. The semiconductor firm is up by 53% over the past year and has gained 428% over the past five years. The asset currently trades at 41x forward earnings.
Synopsys produces silicon chips that have been integrated into technological innovations like machine learning, self-driving cars, smartphones, and others. The firm has been in business for over 35 years and generates billions of dollars in annual revenue.
The company reported record revenue in Q4 2023 which was 25% higher than the same period last year. GAAP EPS exceeded expectations and came in at $2.26 for the quarter. Fiscal 2023 EPS was $7.92. Synopsis reported solid net income growth for the quarter and the entire fiscal year.
In addition, SNPS is is currently rated as a “Strong Buy” and has a 16% projected upside based on the average price target. While the average price target is $625, the highest price target is $675 per share.
Qualcomm (QCOM)
Qualcomm (NASDAQ:QCOM) has not received as much love as the other semiconductor stocks. While it’s missed out on most of the AI rally, shares are gaining momentum. The stock has gained 22% over the past year and has almost tripled over the past five years. The corporation trades at a 22 P/E ratio and has a dividend yield above 2%.
Analysts have rated the stock as a “Moderate Buy” and believe there is an 8% upside from the current price. The highest price target of $180 implies shares can rally by an additional 16.7%.
Revenue inched up by 5% year-over-year in Q1 FY24 as the headwinds have mostly faded for the company. Net income went up by an impressive 24% year-over-year. Gains were partially fueled by easier benchmarks from the previous year.
Qualcomm is not a leader in the artificial intelligence industry, but it has made a splash with its Snapdragon platforms. Generative AI can have many winners, and Qualcomm can position itself as a key beneficiary of the industry.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) has received nearly universal praise from Wall Street ever since its AI boom took shape in 2023. The stock has soared by 223% over the past year and is up by 1,578% over the past five years.
Despite the rally, analysts are still bullish and rate the stock as a “Strong Buy.” The average price target suggests a 16% upside, but some analysts have set ambitious targets for the company. The highest price target of $1,200 suggests that the company can appreciate by an additional 80%. That’s an aggressive price target, but Nvidia investors will be very happy if the asset reaches that price target.
Nvidia has regularly posted explosive revenue growth across multiple verticals, not just artificial intelligence. It has become normal for the company to report triple-digit year-over-year revenue growth and higher net income growth. Nvidia has been the top performer among the Magnificent Seven stocks for some time now.
Lam Research (LRCX)
Lam Research (NASDAQ:LRCX) does not produce chips. However, it offers wafer-fabrication equipment that is essential to create effective chips. In other words, many chipmakers turn to Lam Research for help with creating semiconductors.
The stock has performed well for long-term investors and is up by 398% over the past five years. Shares have also gained 86% over the past year. Lam Research reported $3.76 billion in revenue to close out Q4 2023. It’s a 7.9% increase compared to last quarter’s revenue. Diluted EPS was up by 8.4% compared to the previous quarter.
Tim Archer, Lam Research’s President and CEO explained in a press release that the company is well-positioned to capitalize on AI tailwinds. “With our investments in extending product differentiation and building a flexible and efficient global infrastructure, we are in a strong position to benefit as innovations such as AI power robust semiconductor industry growth in the years to come,” he stated.
Advanced Micro Devices (AMD)
Advanced Micro Devices (NASDAQ:AMD) is another one of the top semiconductor stocks to own. That hasn’t been much of a secret to investors who helped the stock rally to incredible highs. Shares are up by 112% over the past year and have gained 569% over the past five years.
AMD is set to take a bite out of Nvidia’s AI monopoly. The company may not end up with the same growth rates Nvidia enjoyed in 2023. However, Nvidia’s runway suggests Advanced Micro Devices can go on a big run in 2024.
Wall Street analysts have noticed and currently rate the stock as a “Strong Buy.” The average price target suggests a 19% rally from the current price. However, the highest price target of $270 per share suggests the stock can gain over 60% from its current price. AMD closed out Q4 2023 with a 10% year-over-year jump in revenue and an astonishing 3,076% increase in net income.
Microchip (MCHP)
Investors who don’t like the high valuations of semiconductor stocks may want to turn their attention to Microchip (NASDAQ:MCHP). The company is going through some headwinds with an 18.6% year-over-year revenue decline in Q3 FY24. However, the company beat on expectations with a diluted EPS of $0.77 for the quarter.
Microchip also paid out $352 million to shareholders in the December quarter through dividends and buybacks. This includes a 25.7% year-over-year increase in the dividend. You can’t fake dividend increases, and a hike of that magnitude implies strong financials. The company has also been paying down debt and reduced its net leverage to 1.27x.
Microchip’s valuation is an interesting component of the thesis. Shares trade at a 19 P/E ratio and are rated as a “Moderate Buy” among 16 analysts. The average price target suggests a 12% upside for the semiconductor firm. The highest price target of $105 per share implies the stock can rally by an additional 28% from current levels.
On this date of publication, Marc Guberti held long positions in AVGO and NVDA. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
