Semiconductor stocks outperformed the broader market by a wide margin in 2023, which is evident from the 66% gain clocked by the PHLX Semiconductor Sector index as compared to the 24% gain of the S&P 500 index as of Dec. 27.
Booming demand for artificial intelligence (AI) chips played a key role in driving the impressive surge in semiconductor stocks this year. Not surprisingly, prominent semiconductor companies such as Nvidia (NVDA 6.18%) and Advanced Micro Devices (AMD 2.37%) have delivered healthy gains to shareholders in 2023.
The good part is that these semiconductor giants' stocks could continue soaring in 2024 thanks to the emergence of a new catalyst.
The PC market is set to rebound in 2024
Sales of personal computers (PCs) have been declining every quarter since the beginning of 2022. That market experienced a sharp surge in demand in 2020 and 2021 thanks to the coronavirus pandemic, which led many consumers to buy new PCs as they shifted to doing more learning, working, and playing at home. However, that demand disappeared in 2022 and the market is estimated to have declined further in 2023.
The good news: 2024 may be the year when PC sales rise again. Market research firm IDC is predicting a 3.4% increase in PC shipments in the new year, while Canalys is forecasting a jump of 8%.
Both firms assert that the growth will be fueled by the advent of AI-enabled PCs, an aging installed base of existing computers, and the looming necessity for users to upgrade to Windows 11 as Microsoft is set to end support for Windows 10 in October 2025. What's more, IDC is expecting the PC market to clock a compound annual growth rate of 3.1% through 2027.
A turnaround in PC sales would be great news for Nvidia and AMD as both companies supply chips for PCs and rely on this space for significant chunks of their top lines.
Nvidia and AMD would benefit
People install Nvidia's graphics cards in PCs to power graphics-intensive tasks such as game-playing, 3D rendering, and video editing. Nvidia has a market share of more than 80% in discrete graphics cards and it's already witnessing a nice recovery in sales of its PC graphics cards as manufacturers restock their inventories in anticipation of a recovery in demand.
In its fiscal 2024 second quarter, which ended July 30, Nvidia's gaming revenue increased 22% year over year to $2.5 billion. This was followed by a year-over-year increase of 81% in the following quarter. Gaming accounted for nearly 16% of Nvidia's revenue in the most recent quarter and the gaming business's impressive momentum of late is likely to complement the AI-fueled growth of its data center business and lead to impressive growth in 2024.
NVDA Revenue Estimates for Current Fiscal Year data by YCharts.
What's more, Nvidia management said during the November conference call with analysts that "generative AI is quickly emerging as the new killer app for high-performance PCs." The chipmaker is looking to target this market with a new platform that's going to significantly increase the speed of AI inference workloads on PCs, which could lead to a jump in the adoption of its graphics cards.
AMD has also witnessed a sharp turnaround in its PC-focused business, which includes central processing units (CPUs) used in desktops, laptops, and workstations. The chipmaker's revenue from this segment was up 42% year over year to $1.5 billion in the third quarter, and accounted for 26% of its top line.
AMD management said in an October conference call with analysts that sales of its Ryzen AI PC processors "grew significantly in the quarter as inventory levels in the PC market normalized and demand began returning to seasonal patterns." CEO Lisa Su also added that AMD has launched more than 50 new notebook designs powered by the Ryzen AI processors, which are equipped with an on-chip AI accelerator to tackle AI workloads.
Even more exciting, AMD says that it is "working closely with Microsoft on the next generation of Windows that will take advantage of our on-chip AI Engine to enable the biggest advances in the Windows user experience in more than 20 years." AMD seems set to ride the wave of recovery in PC sales, especially considering that it has been grabbing a bigger share of this market.
Analysts are expecting AMD's revenue to increase 17% next year to $24 billion, but the company's growing footprint in the AI data center chip space and a recovery in the PC market could help it deliver a stronger revenue jump. This, in turn, could send shares of AMD higher, which is why investors may want to load up on this semiconductor stock right away.
