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The Semiconductor Supercycle: 5 Reasons to Stay Bullish
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AI Leaders Remain Bullish on the Future
I recently discussed the overwhelmingly bullish sentiment shared among top management teams in the semiconductor space, particularly regarding AI-related growth. Over the last handful of weeks, AI-centric growth stocks like Marvell ((MRVL - Free Report) ), Broadcom ((AVGO - Free Report) ), and Astera Labs ((ALAB - Free Report) ) have seen their shares explode higher after blowing away Wall Street expectations. You can read the full commentary here.
However, as I mentioned in the piece, while industry-wide positive rhetoric can be a bullish omen for investors, these management teams must be taken with a grain of salt as insiders have “skin in the game” and benefit from higher stock prices. With that in mind, I will take the time to conduct a deeper analysis today to provide evidence for these comments and build up conviction for investors in the semiconductor trade into 2025. Below are five reasons to own semis, including:
1. Forward Estimates are Robust for Chip Stocks: An invaluable metric for investors to gauge is Zacks Consensus Estimates, which track a composite of Wall Street analyst estimates into the future. Marvell, which earns a best possible Zacks Rank #1 (Strong Buy), is expected to grow earnings by a juicy triple-digit clip next quarter.
Image Source: Zacks Investment Research
2. Semiconductor Margins are High: Compared to the general market, semis enjoy some of the highest margins on Wall Street, and in most cases, they are growing or remain steady. For example, Nvidia’s ((NVDA - Free Report) ) gross profit margins have grown from the mid-50s in 2023 to north of 75 currently.
Image Source: Zacks Investment Research
3. Smart Money Sponsorship: According to the latest filings with the SEC, legendary billionaire investor David Tepper holds more than two million shares of Advanced Micro Devices ((AMD - Free Report) ). Meanwhile, Tepper isn’t the only deep-pocketed legend interested in chip stocks - fellow billionaire reportedly made a timely purchase of AVGO in his last filing.
4. Historical Seasonality: Historically, the turn of the new year is the optimal time to own the Semiconductor ETF ((SMH - Free Report) ). In addition, option traders have been tagging the semiconductor proxy with bullish call option flow.
Image Source: Equity Clock
5. Big Base Breakouts: Price is the ultimate arbiter of success and the most straightforward metric for investors. That’s a good sign for semiconductors. Several stocks in the industry like AVGO, ALAB, and MRVL, have triggered fundamentally driven, multi-month breakouts. Such moves typically mark the beginning of a new trend, not the end.
Image Source: TradingView
Conclusion
Semiconductor stocks are in the sweet spot between robust forward expectations, clean balance sheets, and fresh multi-month technical breakouts. The odds strongly favor higher prices in this leading industry.
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The Semiconductor Supercycle: 5 Reasons to Stay Bullish
AI Leaders Remain Bullish on the Future
I recently discussed the overwhelmingly bullish sentiment shared among top management teams in the semiconductor space, particularly regarding AI-related growth. Over the last handful of weeks, AI-centric growth stocks like Marvell ((MRVL - Free Report) ), Broadcom ((AVGO - Free Report) ), and Astera Labs ((ALAB - Free Report) ) have seen their shares explode higher after blowing away Wall Street expectations. You can read the full commentary here.
However, as I mentioned in the piece, while industry-wide positive rhetoric can be a bullish omen for investors, these management teams must be taken with a grain of salt as insiders have “skin in the game” and benefit from higher stock prices. With that in mind, I will take the time to conduct a deeper analysis today to provide evidence for these comments and build up conviction for investors in the semiconductor trade into 2025. Below are five reasons to own semis, including:
1. Forward Estimates are Robust for Chip Stocks: An invaluable metric for investors to gauge is Zacks Consensus Estimates, which track a composite of Wall Street analyst estimates into the future. Marvell, which earns a best possible Zacks Rank #1 (Strong Buy), is expected to grow earnings by a juicy triple-digit clip next quarter.
Image Source: Zacks Investment Research
2. Semiconductor Margins are High: Compared to the general market, semis enjoy some of the highest margins on Wall Street, and in most cases, they are growing or remain steady. For example, Nvidia’s ((NVDA - Free Report) ) gross profit margins have grown from the mid-50s in 2023 to north of 75 currently.
Image Source: Zacks Investment Research
3. Smart Money Sponsorship: According to the latest filings with the SEC, legendary billionaire investor David Tepper holds more than two million shares of Advanced Micro Devices ((AMD - Free Report) ). Meanwhile, Tepper isn’t the only deep-pocketed legend interested in chip stocks - fellow billionaire reportedly made a timely purchase of AVGO in his last filing.
4. Historical Seasonality: Historically, the turn of the new year is the optimal time to own the Semiconductor ETF ((SMH - Free Report) ). In addition, option traders have been tagging the semiconductor proxy with bullish call option flow.
Image Source: Equity Clock
5. Big Base Breakouts: Price is the ultimate arbiter of success and the most straightforward metric for investors. That’s a good sign for semiconductors. Several stocks in the industry like AVGO, ALAB, and MRVL, have triggered fundamentally driven, multi-month breakouts. Such moves typically mark the beginning of a new trend, not the end.
Image Source: TradingView
Conclusion
Semiconductor stocks are in the sweet spot between robust forward expectations, clean balance sheets, and fresh multi-month technical breakouts. The odds strongly favor higher prices in this leading industry.