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In today's world, finding any investor who hasn't heard about artificial intelligence (AI) yet would be difficult. Since gaining mainstream prominence through OpenAI's ChatGPT in November 2022, now, enterprises across a diverse range of industries have eagerly mapped out plans and investments to leverage AI into their own products and services.
Unsurprisingly, the market for AI is set to keep growing explosively in the coming years. While this report suggests that the AI market is poised to reach $2.7 trillion by 2032, this research from Bloomberg predicts that generative AI itself will balloon to $1.3 trillion.
In any case, semiconductor chips are an essential component of this AI revolution. Semiconductors are materials that can enable or disrupt the flow of electrical conductivity between conductive and non-conductive materials. Think of semiconductors as tiny switches that can be turned on or off to control the flow of electricity. Projected to become a trillion-dollar industry of their own by 2030, semiconductors are a foundational piece of AI infrastructure.
And it just so happens that the seasonally strong period for chip stocks is upon us, as well. Following a muted Q3 performance, analysts Ben Reitzes and Jack Adair from Melius Research believe that semiconductor stocks are set for a turnaround in Q4. Over the last 14 years, the VanEck Semiconductor ETF (SMH) has averaged an increase of 9.4% in the fourth quarter, per the analysts, compared with a 2.6% average gain in the third quarter.
With both short-term and long-term conditions looking favorable for the chip industry, here are three market-leading stocks that investors can consider to ride this trend.
Semiconductor Stock #1: AMD
Founded in 1969, Advanced Micro Devices (AMD) has been a key player in the chip industry for decades. Based out of Santa Clara, AMD initially focused on manufacturing memory chips. Now, it primarily designs, manufactures, and sells semiconductors, particularly microprocessors and graphics processing units (GPUs).
Valued at a market cap of $265.3 billion, AMD stock is up 13.9% on a YTD basis.
AMD has been growing at a healthy clip over the past 10 years, with revenues and earnings compounding at CAGRs of 14.73% and 32.53%, respectively.
Its results for the latest quarter were impressive as well with both revenue and earnings surpassing estimates. AMD grew its revenues by 9% in Q2 2024 to $5.8 billion, while adjusted EPS rose 19% to $0.69, beating the consensus estimate of $0.68. Over the past 15 quarters, AMD has beaten analysts' EPS estimates on 13 occasions.
Net cash from operating activities came in at $593 million, up 56.5% from the previous year. The company closed the quarter with a cash balance of $4.1 billion, with no short-term debt on its books.
Recently, AMD held its “Advancing AI” event, where it launched its new AI chip - the Instinct MI325X. Slated to begin production before the end of 2024, the new chip is aimed at gaining market share of the lucrative data center GPUs space (forecast to reach $500 billion by 2028, according to the company), currently dominated by Nvidia (NVDA). Along with its data center offering, AMD also launched the new Ryzen AI PRO 300 Series processors for the PC market.
Moreover, its recent acquisition of Silo AI is a strategic move that is expected to reap benefits in the long term for AMD. Silo AI has been a pioneer in scaling large language model training on LUMI, Europe’s fastest supercomputer, powered by over 12,000 AMD Instinct MI250X GPUs. Further, Silo AI's formidable customer base includes AMD's competitor Nvidia, giving the company a considerable boost in the AI solutions race. Lastly, the buyout of Silo AI will provide AMD with another revenue stream from deployed AI solutions, removed from its hardware solutions.
Finally, AMD also enjoys a dominant position in the gaming console processors market, with an 83% share. Notably, AMD is currently the world's leading chip designer as far as chiplet architecture and 3D stacking are concerned, adding diversity to its portfolio.
Powered by its rapidly expanding AI credentials and a diversified revenue stream, analysts have deemed AMD stock a “Strong Buy,” with a mean target price of $192.33. This indicates an upside potential of about 14.6% from current levels. Out of 37 analysts covering the stock, 30 have a “Strong Buy” rating, 1 has a “Moderate Buy,” and 6 have a “Hold” rating.
Semiconductor Stock #2: Broadcom
Founded in 1991 and based out of San Jose, Broadcom (AVGO) is one of the leading semiconductor companies in the world. They design, develop, and supply a wide range of analog and digital integrated circuits (ICs) and other related products, creating the tiny chips that power many of our electronic devices. Broadcom also develops software for data center networking. The company currently commands a massive market cap of $864.3 billion.
AVGO stock has rallied 62.6% on a YTD basis. Broadcom also offers a dividend yield of 1.13%, based on its quarterly payout of $0.53 per share. The company has been raising dividends consistently for the past 13 years, backed by a payout ratio of 46.36% - which allows Broadcom to keep rewarding shareholders, while still reserving most of its earnings for future growth initiatives.
Notably, though investors focused on a narrow revenue guidance miss for the current quarter, Broadcom's results for its fiscal Q3 were impressive, as the company again reported a beat on both revenue and earnings.
Revenues for the quarter came in at $13.1 billion, up 47% from the previous year, led by strength from its AI operations. Both the key segments of Semiconductor Solutions ($7.3 billion, +56% YoY) and Infrastructure Software ($5.8 billion, +44% YoY) reported healthy growth. Adjusted EPS increased by 17.7% in the same period to $1.24, outpacing the consensus estimate of $1.22 and marking the company's 16th consecutive quarterly earnings beat.
Over the past 10 years, Broadcom's revenues and EPS have grown at CAGRs of 29.92% and 31.91%, respectively.
Also during Q3, Broadcom reported net cash from operating activities of about $4.96 billion, compared to $4.6 billion in the year-ago period. Free cash flow increased, as well, coming in at $4.79 billion, or 37% of revenue.
Broadcom's optimism in AI is rooted in its leadership and expertise in developing Application-specific Integrated Circuits (ASICs), traditional computing, and AI acceleration chips. In networking, the company has also doubled its year-over-year switch sales, driven by PAM-5 and Jericho 3 technologies.
This momentum is expected to sustain Broadcom's strong gross margins in the coming quarters. In the fiscal third quarter, gross margins rose by 36% from the previous year, reaching $8.4 billion with a margin of 64%, up from 62% in the prior quarter. The steady increase in gross margin reflects the company's competitive edge in the market.
Broadcom is also a leader in enterprise AI, with its dominance in connectivity and AI infrastructure enabling seamless integration across various organizational components. Its cutting-edge networking and infrastructure equipment play a critical role in supporting AI and other key business functions. Moreover, it has an 80% share in the market for data center/AI Ethernet switching and routing chips.
Beyond AI, Broadcom is making significant strides in the fast-growing edge computing space. In late August 2024, the company introduced three new tools following its VMware acquisition, including advanced network appliances combining fixed wireless access and satellite connections, a new cybersecurity solution, and enhancements to its edge computing stack.
Overall, analysts have deemed AVGO a “Strong Buy,” with a mean target price of $192.04. This denotes an expected upside potential of about 6.3% from current levels.
Out of 33 analysts covering Broadcom stock, 30 have a “Strong Buy” rating and 3 have a “Hold” rating.
Semiconductor Stock #3: Nvidia
We conclude our list with the defining stock of the AI megatrend, Nvidia (NVDA). Nvidia is a leader in specialized AI semiconductors, and the company also supplies software to support the hardware it provides. More specifically, Nvidia designs and sells GPUs for the gaming and professional markets, and system-on-a-chip (SoC) units for the mobile computing market.
Trading under a dollar as recently as 2016, the stock completed a 10-for-1 stock split earlier this year to bring its four-figure share price back down to earth. NVDA is up an impressive 188% on a YTD basis, and the chip giant has surged a staggering 2,730% over the past five years.
Nvidia continued on its streak of posting impressive quarterly results in the fiscal second quarter of 2025, with both revenue and earnings topping estimates. Revenues rose by 122% from the year-ago period to $30 billion, powered by the data center segment, where revenues jumped by 154% from the previous year to $26.3 billion. EPS soared by 152% in the same period to $0.68.
Cash generation during Q2 also remained strong, with net cash from operating activities coming in at $14.5 billion, up 128.2% from the prior year, with free cash flow more than doubling to $13.5 billion in the same period. The company closed the quarter with a mammoth cash balance of $34.8 billion, with no short-term debt on its books.
In the past 10 years, Nvidia has grown its revenues and EPS at CAGRs of 36.14% and 58.47%, respectively.
Nvidia's newest chip, Blackwell, is expected to extend its position as a dominant player in the chip industry. Touted as an improvement over its Hopper architecture, launched two years ago, the Blackwell platform boasts significant improvements in cost and energy efficiency compared to its predecessor. CEO Jensen Huang recently touted “insane" demand for the chip in a CNBC interview.
Further, the company aims to solidify its solid presence in the data center segment through its H100 Tensor Core GPU. This GPU was the fastest available in the market, and therefore in particularly high demand among companies that require a fast tackling of AI and HPC workloads.
The chip giant has software muscle, too. Their Nvidia Inference Microservices (NIMs), unveiled at GTC this year, are production-ready containers that simplify deploying AI models at scale. NIMs slash deployment times from weeks to minutes, according to Nvidia. They work across Nvidia's massive CUDA-enabled GPU base of hundreds of millions and support a wide range of models, including open-source options like Meta's (META) Llama 3.
Finally, Nvidia's Accelerated Computing Platform is set to be its next major growth driver. The platform consists of multiple layers, including chips, systems, software, algorithms, tools, libraries, and implementation support, streamlining the deployment of distributed AI services across on-premises, cloud, or hybrid AI inference computing environments.
AI inference, the phase where AI models are used in real-world applications, requires fast and efficient systems, and Nvidia’s platform provides a significant competitive edge in this area, offering unparalleled speed and efficiency in AI production.
Analysts remain largely bullish about Nvidia stock. The consensus rating is a "Strong Buy,” with a mean target price of $149.99, indicating an upside potential of about 11.3% to current prices.
Out of 41 analysts covering NVDA, 35 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 4 have a “Hold” rating.
