Intel (NASDAQ:INTL) was the most trending stock in pre-market trading on Tuesday after climbing more than 6% to reach a two-month high the day before.
Intel’s good fortune, along with other large cap chipmakers, helped the S&P 500 and NASDAQ inch upwards to close at record highs on Monday. Taiwan Semiconductor Manufacturing Company (TSMC) gained about 5% to briefly cross the $1 trillion valuation mark, while AI-chip favorite NVIDIA and Marvell Technology each gained over 1%.
Monday’s rally is thought to have been partly driven by fresh US jobs data, which arguably favors the case for interest rate cuts. However, sharp gains in tech and AI-led firms have also helped chip stocks.
Upside potential for chip stocks
The global semiconductor industry has been at the forefront of the rally that the broader technology industry has been witnessing over the past year or so. And despite these gains, there is good reason to believe that more will follow.
Most chip stocks continue to benefit from the sustained AI demand as big tech companies boost their capital expenditure to develop their AI infrastructure. Thus, the demand for AI chips will largely help to offset the mixed demand from other segments like smartphones and PCs.
This, in turn, could mean faster revenue growth, higher operating margins, and robust balance sheets for chip stocks. Analysts are aware of this, and that’s likely the reason for their increased price target of major chip stocks.
For instance, Melius Research analyst Ben Reitzes believes Intel could be among the top artificial intelligence players in the second half of this year thanks to its Lunar Lake CPU, which could debut before the year-end.
Similarly, Morgan Stanley raised its price target on TSMC, expecting the company to raise its sales forecast in its next earnings report, which is due in July. Dutch company ASML, TSMC’s equipment supplier, also gained on Monday, making it the third-most valuable company in Europe.
Additionally, USB raised its price target of NVIDIA from $120 to $150, maintaining its buy rating on the stock. NVIDIA has been riding the artificial intelligence wave for quite some time now and briefly became the world’s most valuable company last month.
Beware of volatility
Chip stocks may be expected to continue their bull run in the second half of the year, but investors must avoid complacency, especially with past volatility seen in chip stocks.
NVIDIA, for instance, recently lost more than $500 billion in market capitalization over three trading days soon after it briefly became the most valuable company. Global semiconductor stocks also witnessed volatile trading around the same time, including TSMC, Switzerland-based STMicroelectronics, Europe’s ASML, and Taiwanese chip firm MediaTek.
Some analysts are also flagging the booming demand for generative artificial intelligence as a sign of the segment’s overheating. In a survey by QUICK, released Monday, 9% of respondents said semiconductor stocks are “clearly in a bubble,” while 53% feel they are “bubble-like,” according to Nikkei Asia.
TSMC, the world’s largest contract chipmaker, hinted something similar with its first-quarter earnings report. The company not only lowered its expectations for chip sector growth but also changed its capital spending plans. The company also downgraded its growth forecast for the global foundry sector.
Most chip stocks retreated following TSMC’s commentary – another sign of volatility among the chip stocks.
So what should investors do?
Chip stocks are generally regarded as sound investments, especially now that AI is acting as a catalyst for innovation and growth in the industry. The growing demand for AI-based applications does bode well for major semiconductor stocks going ahead, but they are not without risks.
Investors need to keep an eye on the volatility seen off late among the tech and chip stocks. With earnings season nearing, it is recommended that investors are extra careful with their investment in chip stocks.
