Bank of America said that semiconductor stocks will not peak until mid-2026, and these three sub-industries will thrive before then. #2024 Macro Outlook# #2024 Investment Strategy# #AI Trend# #Technology#
Bank of America said that the semiconductor bull market is far from over, and the momentum of artificial intelligence may keep it heading towards its peak in mid-2026.
The bank said that since the first frenzy of artificial intelligence swept the market, the SOX index tracking semiconductors has surpassed the benchmark index and has risen by 26% so far this year. Compared to the S&P 500, its trading premium is 4 to 5 times.
Recent triggering factors, such as the US election or monetary policy, may lead to a pullback, but analysts say there is ample reason to remain optimistic.
This is because the chip industry usually experiences 10 quarters of growth after experiencing a downturn, and this pattern is just beginning.
"The current up cycle started at the end of 2023, so we are currently only in the third quarter, which means the strength may continue until mid-2026. However, semiconductor stocks (SOX) change direction 6-9 months before the inflection point of the cycle, so semiconductors may reach their peak around 2025, or a little over a year later," Bank of America said.
In addition, the industry is expected to accelerate its double-digit annual sales growth in 2025, which is the case after last year's inventory correction.
For investors trying to seize this opportunity, this note offers three beneficial investment themes: cloud computing, autos, and complexity.
For the first theme, Nvidia is the preferred option, as is Broadcom. Bank of America believes that both have great potential for growth and has set price targets of $1,500 and $1,680 for each company.
At least for Nvidia, part of the optimism comes from the promising prospects for the expansion of artificial intelligence data centers, which provides strong demand for the company's hardware. The bank said that data center systems currently account for about 5%, or $260 billion, of total IT spending worldwide. However, by 2028, this may increase to $360 billion.
At the same time, the increasing importance of chips in the automotive industry should drive up the stocks of NXP Semiconductors and other stocks. The company's price target is $320.
"Industrial / automotive chip stocks are not very crowded and provide diversification away from artificial intelligence." The bank said, "The end of inventory correction may support robust double-digit sales growth for CY25E."
Finally, the increasing complexity of semiconductor manufacturing should support the continuously rising valuations of the industry, thereby proving the trading range of these stocks, such as KLA Corporation and Synopsis. Bank of America has set price targets of $890 and $650 for them, respectively.
Analysts wrote: "The stock trading premium of the top 5 semiconductor equipment companies in the world is 46%, or 26 times CY25 PE relative to the historical average of 18 times." "We expect this premium to continue to exist due to the leverage of AI-driven chip complexity (fundamentals, sentiment), global re-industrialization efforts, and their robust 25%+ free cash flow profit margin even in the recent [wafer fab equipment] trough cycle."