Semiconductor stocks just capped off a strong start to 2024. What to expect in the second half

Published Fri, Jul 5 202410:49 AM EDTUpdated Fri, Jul 5 202411:39 AM EDT

Wall Street is sticking with semiconductor stocks after a hot start to the year. The enthusiasm around the sector, fueled by ongoing artificial intelligence tail winds, has boosted the VanEck Semiconductor ETF (SMH) by 51% in 2024, while popular names such as Nvidia and Super Micro Computer have more than doubled. The run-up has ignited fears of frothiness in the sector, or worries that valuations are becoming too elevated. In fact, some popular names have pulled back recently as investors locked in profits, including Nvidia and Advanced Micro Devices. SMH YTD mountain Share performance in 2024 That said, many investors and analysts expect another strong glide path for the industry in the second half. And, while AI picks and shovels may take center stage, opportunities persist across a variety of contrarian plays. "The AI theme continues to remain very strong," said CFRA Research analyst Angelo Zino, who holds a buy rating on Nvidia. "We like the setup in the second half of the year and for 2025, and you've also got these cyclical themes that are going to gain momentum." Standing by Nvidia, AI mainstays Portfolio managers are still bullish long term on Nvidia despite the 148% rally in shares this year, and the recent pullback. Mahoney Asset Management's Ken Mahoney views the stock move in Nvidia as warranted given the strong fundamentals and the significant head start it holds over competitors. The recent volatility is also warranted after such a mammoth run, he added. John Belton, portfolio manager at Gabelli Funds, noted that fundamentals look strong near term, "but as things go forward, we're in unchartered territory." He said that "as we look next year, we're going to discover more about how big this market is, and that widens the range of outcomes." Harvest Portfolio Management's Paul Meeks expects the initial AI buildout of the infrastructure group that includes Nvidia, Advanced Micro Devices an d Broadcom to take longer than previously anticipated. He's holding off buying in the short term as he awaits more price stability. Broadcom is another first-stage AI play that's garnered the attention of Wall Street in recent months, with shares up 48% year to date. Last month, the networking equipment maker announced a 10-for-1 stock split and strong earnings fueled by AI demand. JPMorgan analyst Harlan Sur also noted that the company likely won a big contract with Alphabet for its next-gen AI application-specific integrated circuit. Sur holds an overweight rating on the stock. Broadcom's design contracts with some of the largest cloud titans should help it win big as AI enters its inference stage, said Baird managing director Ted Mortonson. Shares should also get a boost as original equipment manufacturers input AI into their devices, Zino added. To be sure, Renaissance Macro CEO Jeff deGraaf thinks chipmakers could be volatile through the summer, pointing to historical seasonal weakness for the group. "We really are crossing the seasonal Rubicon here for semis," he told CNBC's "Closing Bell" last month. "Historically, if you follow the seasonal trend, you want to be a seller of semiconductors in late July and you want to sit on your hands until the mid part of October." Beyond the AI linchpins Nvidia may take center stage when it comes to investing behind the industry, but some money managers are scoping opportunities beyond the typical AI plays. Gabelli's Belton highlighted semiconductor equipment makers as a potential alternative which has benefited from the transition toward growing end markets, including autos and consumer devices. Now, an uptick in semiconductor fabrication plants to meet AI demand will require more equipment. ASML Holding's monopoly over lithography — the etching of designs onto silicon wafers — puts them at an advantage in advanced chip technology creation, Belton said. Applied Materials maintains dominance in a stage known as deposition, while KLA Corp . rules over process control. All three stocks have rallied at least 38% this year. "There's only going to be one or two companies that can supply the equipment to the plants," he said. "AI is a clear, incremental growth driver for these companies, but there are all different types of industries, and there's the need for more chips." Synopsys and Cadence Design Systems offer another way to play the sector, dominating the electronic-design-automation software space. Both stocks could get a lift as greater AI sophistication warrants more advanced supporting design systems, Meeks said. Booming AI demand has also ushered in a need for greater memory capacity. Many on Wall Street view this upcycle as a significant tail wind for Micron Technology as the industry edges out of its trough. Micron shares pulled back after topping quarterly estimates while offering an in-line forecast t hat disappointed investors last month. But many on Wall Street viewed the sell-off as a buying opportunity , with Goldman Sachs analyst Toshiya Hari expecting market share gains in high-bandwidth memory. Hari holds a buy rating on Micron. QCOM YTD mountain Shares this year Qualcomm is another name that could win big from the budding use of AI in consumer devices during the second half, according to Zino of CFRA, who holds a buy rating on shares. That could start with Apple, which made headlines last month when it announced plans to input AI features into its latest iPhone models. Apple may be the first major player bringing AI to smartphones, but Zino expects the transition to gain momentum and hit the mainstream at some point in 2025 or 2026 as AI use cases expand to vehicles and automotive. "They have traditionally never played in PCs, but If they get 5% to 10% of the Gen AI PC market, their model explodes on the positive," Baird's Mortonson said.