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Shares of semiconductor company Arm Holdings are likely to list on the equity markets this week after raising $5 billion via an initial public offering. Arm is a U.K.-based semiconductor chip manufacturing company that is currently owned by SoftBank - and will still be majority owned by Softbank after it goes public again.
Arm’s chips can be found in 90% of smartphones globally, and it has shipped over 250 billion chips to date. Part of the catalyst behind the IPO is to raise cash for investments in artificial intelligence (AI), where Arm hopes to compete with chip design rivals like Nvidia (NVDA).
The IPO is likely to value Arm Holding in excess of $50 billion, and has so far attracted an investment of up to $100 million from foundry giant Taiwan Semiconductor (TSM). But while the Arm IPO could be an effective fundraising effort for Softbank, it's likely to be particularly risky investment for the average trader, judging by the performance history of other highly anticipated stock launches.
So if you're looking for an outperforming, buy-rated AI chip stock, here's a look at three better names to buy right now than the Arm IPO.
Broadcom
One of the hottest semiconductor companies of the past decade, shares of Broadcom (AVGO) have returned over 2,000% since September 2013. After adjusting for dividends, total returns are closer to 2,714%.
The tech company offers shareholders an annual dividend of $17.90, translating to a dividend yield of 2.08%. These payouts have risen by 35% annually in the last 10 years, showcasing the Broadcom's appeal as a dividend growth stock.
Broadcom is well-positioned to benefit from the AI boom, as demand for these chips is forecast to accelerate in the next few years. The company manufactures networking chips used in sectors such as wireless and broadband communications, automotive, and industrial. Networking is a major driver of AI growth, and Broadcom said sales from AI-related opportunities rose 10% to account for 15% of semiconductor revenue. Moreover, it expects generative AI to account for 25% of semiconductor sales in fiscal 2024.
Out of the 20 analysts tracking AVGO, 15 recommend a “strong buy,” and five recommend a “hold.” The average price target for Broadcom stock is $955.12, which implies expected upside of nearly 13% from its current price.
Advanced Micro Devices
Next up is Advanced Micro Devices (AMD), which is up 2,730% over the last 10 years, valuing the company at a market cap of $170.16 billion. Investors have piled into AMD this year due to the AI megatrend, which is estimated to reach $2 trillion in global sales by 2030, according to a Statista report.
AMD certainly believes AI to be a key driver of sales. While the AI chip market is dominated by Nvidia, AMD supplies CPUs (central processing units) to data centers that are used for AI processing - and in June, AMD showcased the M1300x accelerator chip, which is its most advanced AI chip.
AMD is forecast to increase sales from $22.8 billion in 2023 to $27.5 billion in 2024. Its adjusted earnings are expected to expand from $2.76 per share to $4.15 per share in this period.
Out of the 28 analysts tracking AMD stock, 21 recommend “strong buy,” 1 recommends “moderate buy,” and six recommend “hold.” The average target price for AMD stock is $141.03, which is 33% above the current trading price.
ASML
The final stock on our list is ASML (ASML), which is up 637% in the last decade. Valued at $247 billion by market cap, ASML designs and manufactures lithography equipment that is used to build semiconductors, which are then used for various AI applications. With a market share of 90% in the lithography market, ASML enjoys a wide economic moat and stable top-line growth.
Along with AI, the company’s chips are used in various markets, ranging from electronics to automotive and data centers. ASML forecasts semiconductor demand to grow by 9% annually through 2030, providing it with enough room to fuel top-line growth. It has already doubled sales from $11.8 billion in 2019 to $25.86 billion in the last 12 months.
Priced at about 30x forward earnings, ASML might seem expensive - but its earnings are forecast to grow by 23.2% annually in the next five years.
Out of the 12 analysts tracking ASML, eight recommend “strong buy,” and four recommend “hold.” The average target price for ASML is $805.17, which is nearly 30% above the current trading price.
