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In a world driven by innovation, semiconductors are the unseen heroes powering our daily lives, from the smartphones in our pockets to the artificial intelligence (AI) systems transforming industries. As AI revolutionizes everything from automation to digital connectivity, the demand for these critical chips is only accelerating. Piper Sandler analysts foresee the semiconductor sector thriving in the coming quarters, driven largely by the ongoing momentum in AI compute markets.
The brokerage firm anticipates that AI-related demand will continue to provide incremental growth opportunities, positioning the largest compute-focused names as clear beneficiaries. While the AI momentum is undeniable, the firm’s outlook for the analog and mobile segments is more tempered. The anticipated recovery in automotive and industrial markets has faced hurdles, particularly in the latter half of 2024.
Although lower interest rates and a stabilizing macro environment have provided a modest lift, Piper Sandler analysts urge caution, suggesting that robust growth in these sectors remains elusive. Amid this mixed market landscape, the brokerage firm has spotlighted three chip stocks poised for success: Advanced Micro Devices, Inc. (AMD), Microchip Technology Incorporated (MCHP), and ON Semiconductor Corporation (ON).
AMD stands out for its critical role in the AI computing arena, driving the next wave of AI innovations. On the other hand, Microchip Technology and ON Semiconductor are making waves as top choices in the analog sector. Plus, both MCHP and ON have substantial exposure to China, where demand trends are showing signs of stability. Let’s take a closer look at these three top-rated chip stocks.
Semiconductor Stock #1: Advanced Micro Devices
Santa Clara-based Advanced Micro Devices, Inc. (AMD) is a titan in the semiconductor industry, offering an unparalleled range of high-performance and adaptive processor technologies. From its humble beginnings in 1969 as a Silicon Valley startup, AMD has transformed into a global powerhouse, delivering cutting-edge CPUs, GPUs, FPGAs, and Adaptive SoCs, along with a wealth of software expertise.
Valued at a market cap of around $269 billion, shares of this mega-cap stock have rallied 55.6% over the past year, soaring beyond the broader S&P 500 Index’s ($SPX) healthy gain of 40% during the same time frame.
On Oct. 29, AMD reported its Q3 earnings results, revealing revenue of $6.8 billion, which soared a solid 18% year over year and slightly outpaced Wall Street’s projections. The company also reported adjusted EPS of $0.92, up 31% annually to beat expectations.
During the quarter, the chipmaker showcased remarkable strength across its segments. The Data Center segment set new records with an impressive $3.5 billion in revenue, reflecting a jaw-dropping 122% year-over-year increase fueled by soaring sales of AMD Instinct GPUs and EPYC CPUs. The chip giant’s adjusted gross margin surged to 54%, up from 51% in the year-ago quarter, underscoring the significant impact of its thriving data center business.
The Client segment also performed admirably, reaching $1.9 billion, up 29% year-over-year, driven by strong interest in the cutting-edge Zen 5 Ryzen processors. However, the gaming segment faced challenges, plunging 69% to $462 million year over year due to waning semi-custom revenue.
CEO Dr. Lisa Su said, “Looking forward, we see significant growth opportunities across our data center, client and embedded businesses driven by the insatiable demand for more compute.”
For the final quarter of fiscal 2024, management projects revenue to reach around $7.5 billion, with a margin of plus or minus $300 million. This midpoint forecast indicates an impressive year-over-year growth of approximately 22% and a sequential increase of about 10%. Additionally, the company anticipates maintaining a non-GAAP gross margin of approximately 54%.
Analysts tracking Advanced Micro Devices expect the company’s profit to increase 28.6% year over year to $2.56 per share in fiscal 2024 and jump another 70.7% to $4.37 per share in fiscal 2025.
AMD stock has a consensus “Strong Buy” rating overall. Out of the 37 analysts offering recommendations for the stock, 30 suggest a “Strong Buy,” one advocates a “Moderate Buy,” and the remaining six give a “Hold” rating.
The average analyst price target of $193.06 indicates a 29% potential upside from the current price levels.
Semiconductor Stock #2: Microchip Technology
Arizona-based Microchip Technology Incorporated (MCHP) is at the forefront of smart, connected, and secure embedded control solutions, empowering customers with user-friendly development tools and a comprehensive product portfolio. Serving around 120,000 clients across diverse sectors, including industrial, automotive, consumer, aerospace and defense, communications, and computing, Microchip helps optimize designs while minimizing risks and reducing overall system costs and time to market.
With a market cap of $42.4 billion, the company is renowned for its exceptional technical support, reliable delivery, and high-quality solutions, making it a trusted partner in innovation. MCHP stock is up roughly 8% over the past 52 weeks, but is down 15% on a YTD basis.
On Sept. 5, Microchip Technology paid out a quarterly dividend of $0.454 per share, reflecting a year-over-year increase of 10.7% from the previous dividend of $0.41 per share. The company’s annualized dividend of $1.81 per share translates to a highly attractive 2.30% yield.
Executive Chair Steve Sanghi emphasized that despite current market challenges, Microchip remains committed to returning 100% of its adjusted free cash flow to shareholders by the March 2025 quarter. Since initiating dividends in 2003, Microchip has raised its dividend 82 times.
On Aug. 1, Microchip Technology released its fiscal 2025 Q1 earnings results. Net sales of $1.2 billion plunged 46% year-over-year, but matched Wall Street’s expectations. Adjusted EPS of $0.53 marked a steep drop from last year’s $1.64 per share, but again, outpaced analysts’ estimates.
During the quarter, Microchip returned approximately $315.3 million to shareholders, including $242.6 million in dividends and $72.7 million through strategic share repurchases, reinforcing the company's dedication to delivering value and confidence in its long-term growth.
Management’s outlook for Q2 of fiscal 2025 calls for net sales between $1.12 billion and $1.18 billion, with adjusted gross profit margins expected to range from 58.5% to 59.5%. Additionally, net income is estimated to land between $217.5 million and $252.4 million, translating to adjusted earnings per share of $0.40 to $0.46.
Overall, Wall Street has a consensus “Strong Buy” rating for MCHP stock. Of the 22 analysts in coverage, 15 advise a “Strong Buy,” one suggests a “Moderate Buy,” and the remaining six recommend a “Hold.”
The average analyst price target of $93.77 indicates an expected upside potential of 23% from current price levels.
Semiconductor Stock #3: ON Semiconductor
Arizona-based ON Semiconductor Corporation (ON) is a leader in integrated semiconductor products, offering a wide array of functions, including power switching, signal conditioning, circuit protection, amplification, and voltage regulation. With a market cap of approximately $32 billion, ON's groundbreaking power technologies are crucial for driving automotive electrification, enabling lighter electric vehicles (EVs), fast-charging systems, and sustainable energy solutions for solar, industrial power, and storage.
While ON Semiconductor is still down 11.2% on a YTD basis, investors have responded positively to the company’s impressive quarterly earnings this week.
On Oct. 29, shares of ON Semiconductor closed up more than 3% as investors responded to Q3 results. The company generated $1.8 billion in revenue, edging past Wall Street’s expectations, while adjusted EPS of $0.99 also topped estimates. ON Semiconductor's commitment to shareholders shines through, having returned a remarkable 75% of its free cash flow over the past year through stock buybacks.
In Q3, the Power Solutions Group (PSG) and Advanced Mobility Group (AMG) remained key revenue contributors, even amid year-over-year declines, while the Intelligent Sensing Group (ISG) posted an impressive 11% sequential growth. By zeroing in on strategic investments and prudent financial management, ON kept its revenue stable despite industry headwinds, reinforcing its resilience and shareholder-first approach.
While reflecting on the company’s Q3 performance, CEO Hassane El-Khoury said, “As power demands continue to rise across our key markets, and the need for greater efficiency becomes paramount, we are investing to win across the entire power spectrum to ensure that onsemi is best positioned to gain share in automotive, industrial and AI data center.”
Looking forward to the final quarter of fiscal 2024, management anticipates revenue to range between $1.71 billion and $1.81 billion, with gross margins expected to range from 44% to 46% on a non-GAAP basis. Adjusted EPS is expected to land between $0.92 and $1.04.
ON stock has a consensus “Moderate Buy” rating overall. Of the 29 analysts in coverage, 15 suggest a “Strong Buy,” one recommends a “Moderate Buy,” 11 maintain a “Hold,” one says it’s a “Moderate Sell,” and one has a “Strong Sell” rating.
The average analyst price target of $86.89 indicates a potential upside of 17.9% from the current price levels.
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