Much of the broad-based market recovery that began early last year has its roots in the growing potential of artificial intelligence (AI). Indeed, the world is just beginning to seize the immense opportunity offered by AI as investors race to profit from these next-generation algorithms. Wall Street is doing its best to stay ahead of the curve, regularly releasing a series of new statements.
This appears to be the driving factor behind a number of stock price movements today, with semiconductor stocks decidedly mixed. Semiconductor manufacturing in Taiwan (NYSE:TSM)also called TSMC, jumped 2.5%, and the semiconductor giant Broadcom (NASDAQ:AVGO) rose 1.6%, while the chipmaker Advanced microsystems (NASDAQ:AMD) fell 4.3% as of 3:07 p.m. ET Monday.
It appears that the opinions of some Wall Street analysts are behind these stock price movements.
Wall Street intervenes
Analysts at Morgan Stanley kicked things off this morning, resuming coverage of Broadcom stock with an Overweight (Buy) rating and a price target of $1,658. This represents an 18% upside potential from the stock’s closing price on Friday. Analysts estimate that Broadcom’s AI-related revenue will more than triple over the next two years, from $4.2 billion in fiscal 2023 to $14 billion in fiscal 2025, which represents 39% of the company’s total semiconductor revenue. As such, analysts have called Broadcom “one of the most powerful AI plays.”
The analysts have probably put their finger on something. Following the release of its first quarter results, Broadcom increased its AI revenue forecast. CEO Hock Tan said, “We now expect AI revenue to be much larger, accounting for about 35% of semiconductor revenue at over $10 billion” in 2024. With this as Starting point, it’s not too hard to see Broadcom hitting analysts’ target over the next couple of years.
Additionally, as a foundry that makes a large number of Broadcom chips, TSMC also benefits, especially since Broadcom is among its largest customers. As Broadcom’s AI business grows, so does the volume for TSMC.
On the other hand, there is Advance Micro Devices, aka AMD. Morgan Stanley also weighed in on AMD’s prospects and deemed them insufficient. Analysts downgraded AMD’s stock from overweight (buy) to equal weight (hold), while maintaining a price target of $176, a less than 5% upside from Friday’s closing price. The analyst suggested that investors set their expectations too high, which pushed AMD’s stock valuation into the stratosphere, especially given the shares’ limited upside potential.
The analysts are right. The inevitable comparison is with the sector leader Nvidiawhich turned the AI revolution into triple-digit sales and profit growth for four consecutive quarters, leading to a 10 for 1 stock split. For comparison, in the first quarter, AMD increased its revenue by only 2% year-over-year compared to 2023 revenue. decreases 4% and earnings per share fell 22%.
Despite a lopsided comparison and mixed results, AMD is actually much more expensive than its main rival, selling for 236 times earnings compared to Nvidia’s 71.
The AI joker
The market for Generative AI is expected to continue its parabolic growth, reaching $1.3 trillion over the coming decade, up from just $40 billion in 2022, according to data provided by Bloomberg Intelligence.
Most of the semiconductors supporting this growth will be supplied by Broadcom and TSMC, representing a boon to these otherwise cyclical chip businesses. However, unlike AMD, Broadcom and TSMC are attractively priced, selling at 30 times and 27 times forward earnings, respectively. This makes them solid additions to any AI-centric portfolio.
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Danny Vena has positions at Nvidia. The Motley Fool holds positions and recommends Advanced Micro Devices, Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Mad Motley has a disclosure policy.
Why Taiwan Semiconductor and Broadcom’s artificial intelligence (AI) stocks soared, while advanced microdevices fell on Monday was originally published by The Motley Fool
