Stocks in Semiconductor Companies Have Just Capped Off a Strong Start to 2024. What to Expect in the Second Half

Wall Street remains committed to semiconductor stocks despite a hot start to the year. Enthusiasm surrounding the sector, largely driven by ongoing advancements in artificial intelligence (AI), has propelled the VanEck Semiconductor ETF (SMH) up by 51% in 2024. Prominent companies like Nvidia and Super Micro Computer have more than doubled their value.

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This surge has sparked concerns about overvaluation in the sector, with fears of a potential bubble forming. Some high-profile names, including Nvidia and Advanced Micro Devices, have experienced recent pullbacks as investors sought to lock in profits. Nonetheless, many investors and analysts anticipate a robust performance for the industry in the second half of the year. While AI-focused companies may dominate the spotlight, there are still opportunities across various contrarian investments.

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CFRA Research analyst Angelo Zino, who holds a buy rating on Nvidia, emphasized the strength of the AI theme, expecting continued momentum in the second half of the year and into 2025. He also highlighted the potential for cyclical themes to gain traction.

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Despite Nvidia's 148% rise in shares this year and a recent pullback, portfolio managers remain optimistic about the company’s long-term prospects. Ken Mahoney of Mahoney Asset Management believes Nvidia’s stock movement is justified due to its strong fundamentals and significant lead over competitors. He also views the recent volatility as a natural outcome following such a substantial run.

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John Belton, portfolio manager at Gabelli Funds, noted that while Nvidia’s fundamentals appear strong in the short term, the future remains uncertain as the market explores the true extent of AI’s potential. Paul Meeks of Harvest Portfolio Management predicts that the initial AI infrastructure buildout, involving companies like Nvidia, Advanced Micro Devices, and Broadcom, will take longer than previously anticipated. Consequently, he is holding off on buying in the short term, awaiting more price stability.

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Broadcom has also attracted significant attention from Wall Street, with its shares up 48% year-to-date. Last month, the company announced a 10-for-1 stock split and reported strong earnings driven by AI demand. JPMorgan analyst Harlan Sur suggested that Broadcom likely secured a substantial contract with Alphabet for its next-generation AI application-specific integrated circuit, maintaining an overweight rating on the stock.

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Broadcom’s design contracts with major cloud providers are expected to be beneficial as AI advances into its inference stage, according to Baird managing director Ted Mortonson. Additionally, shares could see a boost as original equipment manufacturers incorporate AI into their devices, added Zino.

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However, Renaissance Macro CEO Jeff deGraaf cautions that chipmakers might experience volatility through the summer, citing historical seasonal weakness in the sector. He noted that typically, investors should consider selling semiconductor stocks in late July and remain cautious until mid-October.

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While Nvidia may be the primary focus for AI-related investments, some fund managers are exploring opportunities beyond the conventional AI plays. Belton of Gabelli highlighted semiconductor equipment manufacturers as potential alternatives, benefiting from expanding end markets such as automotive and consumer devices. The growing number of semiconductor fabrication plants to meet AI demand will necessitate more equipment.

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ASML Holding, with its monopoly over lithography (the process of etching designs onto silicon wafers), is well-positioned in the advanced chip technology sector, according to Belton. Applied Materials dominates the deposition stage, while KLA Corp leads in process control. These three companies have all seen their stocks rise by at least 38% this year.

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Belton pointed out that only a few companies can supply the necessary equipment for these plants. While AI drives incremental growth, various industries require more chips. Synopsys and Cadence Design Systems offer another avenue for investment, as they dominate the electronic-design-automation software space. These stocks could benefit from increasing AI sophistication, necessitating more advanced supporting design systems, Meeks noted.

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The surge in AI demand has also increased the need for greater memory capacity. Many on Wall Street view this upcycle as a significant positive for Micron Technology as the industry emerges from its downturn. Despite a recent pullback after exceeding quarterly estimates but offering an in-line forecast, many analysts see the dip as a buying opportunity. Goldman Sachs analyst Toshiya Hari expects market share gains in high-bandwidth memory and holds a buy rating on Micron.

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Qualcomm is another potential winner from the growing use of AI in consumer devices during the second half, according to Zino of CFRA, who has a buy rating on the stock. This trend could start with Apple, which recently announced plans to integrate AI features into its latest iPhone models. While Apple may be the first major player to bring AI to smartphones, Zino expects this trend to gain momentum and become mainstream by 2025 or 2026, expanding to vehicles and automotive applications.

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Baird’s Mortonson added that Qualcomm traditionally hasn’t been a player in the PC market, but even capturing a small share of the generative AI PC market could significantly boost their model.

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