BofA named favorites in a game of "musical chairs" in semiconductor field

The semiconductor sector is entering the phase of the "game of musical chairs", believes Bank of America analyst Vivek Arya, writes Yahoo Finance. But the most obvious market participants can win in this game, the expert believes.

Among his top favorites in the semiconductor sector, the analyst named Nvidia, Broadcom, Advanced Micro Devices (AMD) and Credo Technology, which already dominate the market. Despite their scale, all of them, according to Arya, "are capable of increasing revenue by an average of 42%." The analyst explained this stance by the fact that these companies are trading on a "markedly attractive" valuation: the PEG (price to earnings growth) ratio for them, according to Arya's calculations, is about 0.5x. For an industry often criticized for inflated multiples, such metrics indicate that the biggest players in the AI market are actually valued by investors at a significant discount to expected growth rates, Yahoo Finance notes.

This suggests that, contrary to market fears of possible overvaluation in the sector (what Arya calls "a game of musical chairs"), the major AI market players may still represent the most profitable opportunities.

Since the beginning of the year, the Philadelphia Semiconductor Industry Index (SOX) is up about 11%, while the S&P 500 has only added about 2%. However, BofA warns: the "easy money" on semiconductor equipment maker stocks has probably already been made. Now the bank is signaling a possible "reshuffle" in the sector - a reallocation of funds from expensive instrument maker stocks back into computing power providers like Nvidia.

Arya's skepticism of current market leaders is based on mathematical estimates. In his opinion, to justify the current market value, many shares of semiconductor equipment manufacturers need a significant revision of earnings forecasts. Without a marked increase in consensus expectations, such securities have probably already passed the peak of the current cycle, the analyst believes.

Although the current "shuffle" is centered on the largest players in the computing segment, Bank of America's interest in the AI boom is not limited to trillion-cap companies, Yahoo Finance notes. This strategy fits into the broader investment vision that Vivek Arya outlined back in December.

At that time, he singled out a group of small and mid-capitalization (SMID) stocks that are able to benefit from the AI trend. Among such alternative bets, the analyst named Credo Technology Group, MKS Instruments and Advanced Energy Industries - companies that, according to the analyst's estimates, could benefit indirectly from the large-scale build-up of AI capacity.

Securities Nvidia and Broadcom at the beginning of trading on January 27 added 1.6% and 1.3%, respectively, shares of AMD rose by 0.9%, quotes Credo Technology jumped by 2.5%.

Arya voiced his position on the future dynamics in the semiconductor sector ahead of the start of a week of corporate reports among semiconductor companies. In particular, analog and embedded chip maker Texas Instruments will report its results on January 27 after the market closes. On the next day, January 28, Dutch semiconductor equipment manufacturer ASML and chip equipment supplier Lam Research will report.

This article was AI-translated and verified by a human editor