The market rotation out of AI winners (mostly chip stocks) has gotten extreme in recent days. This change in investor sentiment comes after a period of significant outperformance by these companies, including the best chip stocks like Nvidia (NASDAQ:NVDA), AMD (NASDAQ:AMD), Broadcom (NASDAQ:AVGO) and Micron Technology (NASDAQ:MU), particularly over the past 12 to 18 months.
This trend reversal has taken place over the last few days, with mega-cap stocks receding from their high valuations while the average stock remains near record levels. Overall, the iShares Semiconductor ETF (NASDAQ:SOXX), which is a gauge for the performance of chip stocks, corrected about 15% from recent highs.
The trigger has been the softer-than-expected inflation report, which has rapidly increased changes that the Federal Reserve will start cutting rates in September. As such, the rates-sensitive cyclical sectors, which are mostly reflected in the small-cap Russell 2000 index, saw their valuations surge at the expense of AI winners.
Another key reason for the rotation could be the steep valuation of these mega-cap stocks. Nvidia, known for producing advanced chips essential for AI computing, saw its share price skyrocket within a year by mid-July. Meanwhile, the company’s earnings per share increased by 629% over the last four quarters on the back of surging revenue. But, concerns have been raised about the sustainability of such growth.
Analysts predict that Nvidia’s revenue and EPS could continue to grow between 2024 and 2026, yet there is caution about whether such a pace can be maintained by a company already at the top in terms of market capitalization. Still, as long as Nvidia can deliver on these high expectations, the AI trade remains alive.
Here are three of the best chip stocks to buy as prices correct from record highs.
Taiwan Semiconductor Manufacturing Company (TSM)
Taiwan Semiconductor Manufacturing Company (NYSE:TSM) is the world’s largest contract chip manufacturer, dominating the global semiconductor industry. Known for advanced technology and high-quality production, it supplies leading tech giants. Investing in TSM offers exposure to its crucial role in global electronics supply chains.
Prior to the correction in chip stocks, shares of TSMC gained after the company announced June sales figures. The leading chipmaker’s recent sales data suggest a stronger-than-anticipated demand, particularly in the realm of AI infrastructure.
TSMC’s second-quarter sales outperformance is indicative of robust demand. The sales strength is expected to counterbalance some of the margin erosion that may result from the ramp-up of the company’s 3-nanometer technology, potentially leading to an earnings beat.
Analysts see TSMC delivering better gross margins, and many believe that there is a significant chance that the company could increase its full-year revenue guidance to high-20% year-over-year growth, given its strong order visibility. In this case, TSMC stock should stage another rally.
Micron Technology (MU)
Micron Technology, one of the best chip stocks, specializes in memory and storage solutions, including DRAM and NAND flash. As data consumption and storage needs surge, Micron’s innovative products cater to diverse markets such as data centers, mobile devices and automotive.
Micron reported a very strong set of third-quarter results recently, with adjusted revenue rising to $6.81 billion, marking an 82% increase year-over-year and beating the consensus estimate of $6.67 billion.
The semiconductor company also reported adjusted earnings per share of 62 cents, a stark contrast to the loss of $1.43 per share in the same period the previous year. This performance exceeded the estimated 51 cents per share.
Micron’s adjusted operating income was $941 million, recovering from a loss of $1.47 billion year-over-year, surpassing estimates. Micron’s cash flow from operations was reported at $2.48 billion, a substantial improvement from the $24 million generated in the same quarter last year.
Analysts attributed these positive results to healthy overall supply and demand dynamics in the DRAM market. This is primarily supported by robust demand for high bandwidth memory (HBM), which is seen as a key component for high-end AI chips.
Broadcom (AVGO)
Broadcom is a major supplier of semiconductor and infrastructure software solutions. With a strong presence in wireless communications, networking and broadband, it benefits from widespread tech adoption, especially in the AI era.
Broadcom shares experienced their largest one-week percentage gain on record in June, propelled by robust quarterly results highlighting the company’s stronghold in the AI sector and solidifying its position among the best chip stocks. Over the week, the stock climbed by double-digits, substantially increasing its market value.
The company reported second-quarter earnings that surpassed expectations and provided an optimistic outlook, buoyed by the high demand for its artificial intelligence products. Furthermore, Broadcom declared a 10-for-1 stock split.
Broadcom reported adjusted EPS of $10.96, higher than the consensus estimate of $10.84. Adjusted net revenue was also above expectations, coming in at $12.49 billion against an estimated $12.03 billion.
A breakdown of the revenue streams shows that semiconductor solutions, a key sector for Broadcom, brought in $7.20 billion, slightly above the anticipated $7.12 billion. Infrastructure software, another significant segment for the company, generated $5.29 billion in revenue, surpassing estimates.
On the date of publication, Shane Neagle did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.