Semiconductor Index Made a Comeback Despite Volatility! Which Stocks Have the Most Upside?

The Philadelphia Semiconductor Index has risen for four consecutive days following a sharp decline the previous week. Some traders believe this may be due to short covering from a technical analysis standpoint, but most people seem to support the idea that demand for high-end chips still has room to grow. The PHLX Semiconductor Index has increased by 8.18%, driven by gains from Nvidia, TSMC, and Broadcom, which rose 15%, 10%, and 20%, respectively.

Artificial intelligence has recently faced challenges like inflated market expectations and bubble concerns, with uncertainties such as upcoming interest rate cuts and elections adding to the mix. Despite this volatility, major chip giants still have Wall Street's favor, with potential gains of 20% to 40%. How should investors view the investment prospects of semiconductor stocks?

Nvidia CEO Jensen Huang's speech at the Goldman Sachs Communacopia & Technology Conference truly helped fuel the bullish comeback of the sector. At the conference, Huang discussed the company's competitive advantages, its rivals, and supply chain dynamics.

"We have a lot of people on our shoulders, and everybody is counting on us," Huang said during a conversation with Goldman Sachs CEO David Solomon. He added, "Demand is so great that delivery of our components, our technology, infrastructure, and software is really emotional for people, because it directly affects their revenues, it directly affects their competitiveness."

From a trading perspective, the market needs bullish comments from the "most important man" in the AI industry because both Nvidia and Broadcom faced capital outflows despite delivering solid results during the recent earnings season, as high investor expectations led to a "sell on news" reaction.

Concerns linger over whether an economic slowdown could hinder the rapid growth of AI demand, while major internet companies—the key buyers of AI chips—are under pressure to prove that their hefty investments in GPUs and AI hardware will generate sufficient revenue. However, this week's sharp stock rebound suggests that the earlier wave of selling has subsided and negative sentiment is easing. Bernstein analyst Stacy Rasgon believes investor enthusiasm may have paused, but the underlying demand for AI chip stocks remains robust, a sentiment echoed by Nvidia CEO Jensen Huang.

AI tech stocks, particularly semiconductor companies, are facing the challenge of "overly high expectations," which create short-term performance pressures. Since semiconductors are widely used in household appliances, smartphones, computers, and cars, they are also vulnerable to demand slowdowns in these industries, adding to the uncertainty. Morgan Stanley Research predicts that global semiconductor revenue will peak in Q3 2024, though the institution still expects three more quarters of double-digit growth.

However, the long-term outlook for AI remains bright, with significant growth potential. The future performance of semiconductor stocks will largely depend on whether demand for AI and related technologies remains robust. Many international institutions hold an optimistic view, predicting a 20%-30% expansion in the semiconductor industry driven by AI demand.

Even though the short-term market movement has started to show a weakening trend, AI adoption still has a long way to go, with the market projected to be worth between $2.6 trillion and $4.4 trillion annually, according to McKinsey & Company. Even if companies like Nvidia, Broadcom, and Oracle capture just a fraction of that potential, they stand to profit significantly—along with their shareholders.

Source: Morgan Stanley Research, Yahoo Finance