TL;DR:
- Semiconductor chips and AI are driving the technology of the future.
- Philadelphia Semiconductor Index (PHLX) has gained 39% this year, reflecting the growing interest in AI chip stocks.
- Nvidia, the eighth-largest chip maker, is a leader in GPUs and has seen significant gains due to demand for its AI-focused products.
- OpenAI’s reliance on Nvidia GPUs for training AI models further solidifies its position in the AI hardware market.
- AMD, a top-ten chip-making firm, has a wide AI-focused portfolio and is strategically investing in the AI market.
- Analysts have a positive outlook on both Nvidia and AMD, with expectations of continued growth in AI-related revenues.
Main AI News:
The captivating combination of artificial intelligence (AI) and semiconductor chips has been captivating the imagination of investors, and rightfully so. These two fields are driving the technology of the future, with semiconductor chips playing a ubiquitous role in our digital age and AI revolutionizing the way we interact with machines. The convergence of these domains opens up a realm of limitless possibilities.
Investors are particularly thrilled about this prospect. The Philadelphia Semiconductor Index, or PHLX, which tracks the performance of the 30 largest semiconductor makers, has witnessed a remarkable 39% surge year-to-date. The reasons behind this upswing are compelling. While semiconductors have been an integral part of today’s digital world for decades, the incorporation of AI propels them into the realm of tomorrow’s technology. Recognizing this potential, investors have flocked to chip makers as the go-to investment avenue for AI-related stocks.
The crucial question that arises now is: how much further can AI chip stocks grow? To gain insight into this matter, we turn to the analysis of renowned stock experts on Wall Street. Their perspectives shed light on the future trajectory of AI and semiconductors. Let’s delve into their insights and discover which AI-related chip giants they recommend.
Nvidia Corporation takes the lead as a major player in the semiconductor industry, currently ranking eighth in terms of revenue. Nvidia has cemented its position as a leader in the production of high-quality graphics processing units (GPUs). These GPUs possess immense computing power, making them ideal for high-end applications such as professional graphic design, high-end gaming, and, notably, AI. The increasing demand for Nvidia’s GPUs, particularly in the AI sector, has been the driving force behind the stock’s impressive year-to-date gains of approximately 190%.
Recent data confirm that Nvidia’s success hinges on its AI products. OpenAI, the company behind the creation of ChatGPT, has relied on Nvidia’s GPUs since 2020 to train its AI models, employing a staggering 20,000 chips. Looking ahead, OpenAI anticipates the need for an additional 10,000 chips to maintain the efficiency of ChatGPT. This strong foundation underscores Nvidia’s robust performance, as demonstrated by its impressive beat in Q1 financial results. Despite a 13% decline in total revenue compared to the previous year, Nvidia surpassed expectations by a substantial $670 million, reporting $7.19 billion in revenue. Moreover, the company’s non-GAAP EPS of $1.09 outperformed estimates by 17 cents per share.
Nvidia’s positive guidance further bolsters its appeal to investors. The company projects $11 billion in sales for its fiscal Q2, marking a substantial increase from its previous guidance of $7.2 billion. Achieving this milestone would translate into a remarkable 41% year-over-year growth in quarterly revenues.
Morgan Stanley’s esteemed 5-star analyst, Joseph Moore, acknowledges the strength of Nvidia’s AI capabilities. Moore asserts that NVDA should trade at a premium to its peers, given the higher likelihood of near-term upward revisions. Surprisingly, the multiple premium that Nvidia enjoyed over its peers has considerably narrowed. However, Moore emphasizes the continued growth potential in Nvidia’s data center business, predicting it will surpass that of other compute players. He notes that Nvidia has no offsetting or cannibalized compute business outside of the AI sector, cementing its status as the leading player in AI hardware.
Consequently, Moore assigns an Overweight (Buy) rating to NVDA, designating it as his Top Pick. With his optimistic outlook, Moore envisions NVDA reaching $500 within the next year, implying an 18.5% gain from current levels.
Turning our attention to Advanced Micro Devices (AMD), we find a perennial presence among the top ten largest chip-making firms. Over the last four quarters (2Q22 through 1Q23), AMD recorded total revenues of $23.06 billion. With a market capitalization of $188 billion, AMD boasts an extensive portfolio in the AI ecosystem, including high-performance chips and architecture.
AMD’s AI involvement encompasses various products, such as the Instinct GPU accelerators, the Alveo Adaptive accelerators, and the EPYC server processors. The company also offers a diverse range of chips, including the Ryzen AI mobile processors and the Versal AI core adaptive SoCs. These AI chips and accelerators find applications in a wide range of fields, from gaming to data centers to supercomputers, delivering the processing speed and capacity required for generative AI.
Recent financial performance indicates that AMD exceeded expectations. In Q1 of this year, the company reported total revenues of $5.35 billion, surpassing estimates by $40 million. Although this represented a 9% decrease compared to the previous year, AMD’s non-GAAP EPS of 60 cents per share outperformed forecasts by 4 cents. However, the company’s Q2 revenue guidance of $5.3 billion fell short of the $5.52 billion expectations, which some analysts considered weak.
AMD’s strategic focus has shifted toward the burgeoning AI market, prompting substantial investments in networking and data center AI operations. AMD’s new Ryzen 7000 series integrates AI processing capabilities, while the MI300 chips cater to both high-performance computing and AI applications. The rapidly expanding field of generative AI offers substantial support for AMD’s AI track.
Baird analyst Tristan Gerra, acclaimed with a 5-star rating from TipRanks, highlights these key factors when discussing AMD. Gerra asserts that the Mi300x chips offer best-in-class TCO performance for inference applications. He notes that AMD’s management reiterates its expectation of significant AI revenue starting in 4Q23, based on engagements with multiple hyperscalers. Gerra predicts a >50% CAGR for data center AI acceleration by 2027, leading to a TAM (total addressable market) of $150 billion or more. While Nvidia’s ecosystem may be more mature, Gerra believes that AMD is well-positioned to benefit from the medium-term growth trends in AI.
In light of these factors, Gerra bestows an Outperform (Buy) rating upon AMD shares, accompanied by a price target of $170. This projection suggests a potential upside of 54.5% over the next 12 months.
Overall, analysts on Wall Street hold a Moderate Buy consensus rating for AMD, with 21 Buy recommendations and 8 Holds among the 29 recent analyst reviews. With the current trading price at $110.01, the average price target of $134.31 indicates a projected appreciation of 22% in the coming year.
Nvidia, on the other hand, secures a Strong Buy rating according to the consensus of 33 recent analyst reviews, with an overwhelming majority of 30 Buys and merely 3 Holds. Trading at $422.09, the average price target of $464.85 implies a modest 10% upside over the next 12 months.
Conclusion:
The remarkable growth of AI chip stocks, driven by the convergence of semiconductor chips and AI technology, has caught the attention of investors. Nvidia and AMD, as leading players in this space, are capitalizing on the demand for AI-focused products and have demonstrated strong financial performance. Their strategic investments in AI hardware and their expanding portfolios position them well for future growth in the AI market. With positive analyst ratings and the potential for continued innovation, these companies are set to play a significant role in shaping the future of technology.
