Wednesday is turning out to have been a terrific day to own semiconductor stocks, with shares of rising artificial intelligence (AI) chipmaker Advanced Micro Devices (AMD 2.37%) up 5.7% through 3:15 p.m. ET, semiconductor manufacturing equipment maker Applied Materials (AMAT 2.98%) gaining 4.8%, and server and data storage solutions provider Super Micro Computer (SMCI 8.89%) eking out a 2.8% gain.
And it all began with an upgrade for AMD.
New Street, new buy rating
London-based stock research shop New Street announced last night it is upgrading AMD stock from neutral to buy, with a $215 price target implying it expects the shares to rise 28% through the end of this year, as The Fly reports. Of all the semiconductor companies trying to build chips for AI functions, said the analyst, AMD is the stock with the most upside, the best chance of outperforming expectations, and the best valuation to buy.
New Street bases its buy recommendation on AMD's own research, which predicts that by 2027, companies around the world will collectively spend as much as $400 billion annually on datacenter chips for artificial intelligence.
That's a big number. And while New Street isn't 100% convinced this number should be "taken seriously," if it does prove accurate, New Street believes it implies "fast adoption" of AI all around the globe -- and a situation in which demand must rise faster than supply. That logically would mean both strong revenue growth and strong profit margins for AI chip suppliers such as AMD -- but not only for AMD. As StreetInsider points out, reviewing the same report, New Street thinks there could be upside for "all names in the data center AI chip sector."
And that implies that this good news for AMD is also good news for Applied Materials (which builds the machines that build the AI chips) and for Super Micro Computer (which builds the AI servers that incorporate the AI chips) as well.
Should you buy AMD, Applied Materials, or Super Micro Computer stock?
Which of these stocks offers the best buying opportunity? Based on its new buy rating, New Street appears to be firmly in the AMD camp. (Although the analyst also had some kind words for Taiwan Semiconductor Manufacturing, AMD's contract chip manufacturer, which the analyst says is the "most de-risked," aka safest, play in the semiconductor sector).
Personally, I'm a fan of safety and with a 22x trailing earnings valuation, TSMC looks to me like a much safer play than AMD stock at 1,530 times earnings. But I'm also a fan of picks-and-shovels plays. And if you ask me, Applied Materials is the kind of stock that should make a lot of money selling machines to semiconductor companies that want to make AI chips -- especially if this turns out to be a $400 billion market.
As for Super Micro Computer stock, honestly, I haven't paid a lot of attention to it in the past. But between its strong free cash flow ($592 million over the past year, very close to its reported net income of $613 million), fast projected growth rate of 25%, and a P/E ratio that looks expensive (42 times earnings) but maybe not too expensive in light of the growth rate, this is another stock I think might be worth keeping an eye on.
New Street just might be right. Maybe not all of the names in the data center AI chip sector -- but certainly a lot of them -- are looking pretty good right now.
