Wall Street is reevaluating its outlook for some AI-centric stocks.
Much of the broad market rally that began early last year has its origins in the growing potential of artificial intelligence (AI). Indeed, the world is just beginning to grasp the vast opportunity afforded by AI as investors scramble to profit from these next-generation algorithms. Wall Street is doing its level best to stay ahead of the curve, regularly releasing a flurry of new pronouncements.
That appeared to be the driving factor today behind a number of stock-price movements today, as semiconductor stocks were decidedly mixed. Taiwan Semiconductor Manufacturing (TSM 2.29%), also called TSMC, jumped 2.5%, and semiconductor giant Broadcom (AVGO 2.40%) rallied 1.6%, while chipmaker Advanced Micro Devices (AMD -4.49%) slumped 4.3% as of 3:07 p.m. ET on Monday.
It appears the opinions of some Wall Street analyst’s were behind these stock-price movements.
Image source: Getty Images.
Wall Street weighs in
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. That represents potential upside of 18% compared to the stock’s closing price on Friday. The analysts believe Broadcom’s AI-related revenue will more than triple over the next couple of years, growing from $4.2 billion in fiscal 2023 to $14 billion by fiscal 2025, representing 39% of the company’s total semiconductor revenue. As such, the analysts dubbed Broadcom “one of the strongest AI plays.”
The analysts are likely onto something. In the wake of its first-quarter results, Broadcom boosted its AI-related revenue guidance. CEO Hock Tan said, “We now expect revenue from AI to be much stronger, representing some 35% of semiconductor revenue at over $10 billion” in 2024. With that as a starting point, it isn’t too much of a stretch to see Broadcom reaching the analyst’s target over the next couple of years.
Furthermore, as the foundry that makes a great many of Broadcom’s chips, TSMC also benefits, particularly since Broadcom is among its biggest customers. As Broadcom’s AI business grows, volume also grows for TSMC.
On the other hand, there’s Advance Micro Devices, aka AMD. Morgan Stanley also weighed in on AMD’s prospects and found them lacking. The analysts downgraded AMD stock to equal weight (hold) from overweight (buy) while maintaining a price target of $176 or less than 5% upside compared to Friday’s closing price. The analyst suggested that investors have set their expectations too high, driving AMD’s stock valuation into the stratosphere, particularly given the stocks’ limited upside.
The analysts have a point. The inevitable comparison is to industry leader Nvidia, which has parlayed the AI revolution into triple-digit sales and profit growth for four consecutive quarters, leading to a 10-for-1 stock split. By comparison, in Q1, AMD grew revenue by just 2% year over year after full-year 2023 revenue declined 4% and earnings per share fell 22%.
Despite the lopsided comparison and tepid results, AMD is actually much more expensive than its chief rival, selling for 236 times earnings compared to 71 for Nvidia.
The AI wildcard
The market for generative AI is expected to continue its parabolic growth, surging to $1.3 trillion over the coming decade, up from just $40 billion in 2022, according to data supplied by Bloomberg Intelligence.
Many of the semiconductors underpinning this growth will be supplied by Broadcom and TSMC, representing a windfall for these otherwise cyclical chip businesses. Unlike AMD, however, Broadcom and TSMC are attractively priced, selling for 30 times and 27 times forward earnings, respectively. This makes them solid additions to any AI-centric portfolio.
Danny Vena has positions in Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.