Chasing Nvidia! Citi: Broadcom may take over as the "hottest AI chip stock"

According to the information obtained by Citigroup Financial News, after discussions with investors last week, Citigroup evaluated the semiconductor industry on Monday and put forward some new views, including that Broadcom (AVGO.US) may catch up with NVIDIA (NVDA.US) in terms of positive sentiment.

The company's analysts wrote in an investor report: "From our conversations, it seems that Broadcom is catching up with NVIDIA to become a top holding, as Broadcom has more artificial intelligence clients joining (Open AI and ByteDance), and business from VMware is also increasing. We also believe that some investors are feeling fatigued with NVIDIA." NVIDIA is the most popular tech stock this year. However, concerns about competition, high valuations, and geopolitical uncertainties have put pressure on its stock price. Nevertheless, NVIDIA's stock price has still risen by 138% this year, while Broadcom's stock price has risen by 41%.

Citigroup also found that investors are optimistic about NXP Semiconductors (NXPI.US) and Analog Devices (ADI.US) due to inventory replenishment. Citigroup analysts stated: "In the analog field, benefiting from inventory replenishment, NXP Semiconductors remains the most favored stock, followed by Analog Devices." Despite this, Citigroup maintains a "sell" rating on NXP Semiconductors, citing "downside risks due to self-recall." NXP Semiconductors is scheduled to announce its second-quarter earnings after the U.S. stock market closes on Monday. Analysts generally expect the company's revenue to be $3.12 billion and earnings per share to be $3.20.

In other areas of analog chips, Citigroup pointed out that some hedge funds are starting to buy Texas Instruments (TXN.US) as they anticipate an increase in the company's profits and a decrease in capital expenditures. Citigroup wrote: "We believe revenue will rise, but we are skeptical about the decline in capital expenditures this earnings season. We believe that the likelihood of Texas Instruments reducing capital expenditures before the end of this year is higher." Citigroup also noted that mutual funds are "not interested" in the company until they see Texas Instruments' gross margin bottoming out.

Citigroup also stated that some hedge funds are buying ON Semiconductor (ON.US) because they believe the company will "outperform expectations and raise stock prices" during the earnings season. However, Citigroup recently downgraded its rating from "buy" to "neutral" due to risks in the silicon carbide business.

On the other hand, according to Citigroup, AMD (AMD.US) and Microchip Technology (MCHP.US) are currently considered the least favored companies by investors. Concerns about the reduction in production of AMD's MI300 and further decrease in revenue for Microchip Technology are driving this negative sentiment. Citigroup stated: "We do not expect a reduction in MI300 production, but we believe Microchip Technology's guidance may be slightly below market consensus."

Citigroup has also placed Micron Technology (MU.US) on its negative watchlist. Citigroup stated: "The stock may underperform in the next month as we expect Samsung to obtain NVIDIA HBM chip supply qualifications in the third quarter of 24 and increase capital expenditures. Competitive pressure will put short-term pressure on Micron's stock price "Despite varying market sentiments, Citigroup remains extremely bullish on the entire semiconductor industry." Citigroup's optimism for the semiconductor sector stems from stronger-than-expected equipment sales and ongoing corporate spending in artificial intelligence. As the earnings season approaches, the company's top picks include Nvidia, AMD, Broadcom, and Marvell Technology (MRVL.US), all of which are primarily involved in artificial intelligence. Citigroup believes that despite high valuations, the Philadelphia Semiconductor Index can continue to rise.

Citigroup analyst Christopher Danely wrote in an investor report: "We expect the second quarter of 24 to be a positive catalyst for the semiconductor sector, with industrial end-market inventory replenishment, the stabilization of artificial intelligence, PC, wireless, and data center end markets (which collectively account for 62% of semiconductor sales), and better data/guidance from analog chip companies. Despite high valuations, we believe that the Philadelphia Semiconductor Index can continue to rise, citing our first rule of semiconductor investment: 'Do not buy or sell based on valuations.'"