These chip stocks could soar over the next few years.
The S&P 500 has rocketed 49% since bottoming out in 2022. The good news is that we’re less than two years into this bull market, and the average bull market lasts 4.9 years with an average return of 177%, according to Stifel. History says investors are looking at several more years of easy pickings.
Leading semiconductor makers, which serve artificial intelligence (AI) training needs, have seen their share prices soar over the past year. But two Wall Street analysts see more upside for the following stocks.
1. Arm Holdings
Arm Holdings‘ (ARM 1.86%) share price has surged over the last year as data centers and device manufacturers have increasingly used Arm-based chips due to their high performance and energy efficiency. AI will be a key driver of growth for the semiconductor industry over the next decade. While Nvidia dominates the market for graphics processing units (GPUs), companies are also investing in custom central processing units (CPUs).
Arm licenses its CPU products and then charges royalties on every chip shipped that uses the company’s technology. It’s a very profitable business model, which is why William Blair analyst Jason Ader rates the stock with an outperform (buy) rating. The company’s licensing and royalty-based revenues translate to an adjusted operating profit margin of 48%. Very few companies earn such high margins, and that’s one factor fueling the stock higher.
Arm chips are used in virtually every smartphone worldwide, but it’s also gaining market share in several other markets, including consumer electronics, cloud computing, networking, automotive, and the Internet of Things. According to William Blair, there is more than $200 billion of chip value across these markets.
Arm’s high-margin business has a long tailwind of growth in a semiconductor industry forecast to grow 10% annually, according to Statista. Arm’s revenue grew 39% year over year last quarter, driven by growing royalties and market share gains. The stock trades at an expensive price-to-earnings ratio, but investors who dollar-cost average into the stock should earn great returns over the long term.
2. Marvell Technology
Generative AI is a subset of the AI market fueling new software development and driving substantial growth for data centers and cloud service providers. These AI applications can create images and videos from simple text instructions, which requires tremendous computing power and massive amounts of data.
Marvell Technology (MRVL 3.19%) is well-positioned to benefit. The company provides chips and software that help components transmit data faster. Its products are used in a variety of markets, including self-driving cars, data centers, and consumer electronics.
Roth MKM analyst Suji Desilva likes Marvell’s opportunity in custom AI chips. Last quarter, the company was ramping up its first two chips as part of its AI custom silicon program. Data center revenue grew 92% year over year last quarter, and management is forecasting that this will accelerate in the third quarter, with a higher contribution coming from custom AI silicon.
The analyst sees a lot of opportunity for Marvell to participate in the increasing buildout of AI infrastructure. Indeed, the infrastructure for AI data centers is completely different from standard cloud infrastructure. These new data centers need thousands of AI accelerators, or GPUs, and these GPUs require significantly more robust networking systems to send data back and forth to make AI work. This is fueling demand for Marvell’s leading electro-optics products.
However, Marvell still reported a decline in revenue of 5% year over year last quarter. This stems from weak sales in non-AI businesses, like enterprise networking and carrier, but a recovery here will become another growth catalyst. These businesses are already showing stable sales performance, and management expects its enterprise networking and carrier businesses to show sequential growth in the third quarter.
The Wall Street consensus has Marvell’s revenue increasing slightly for the full year. Looking ahead to next year, revenue is expected to jump 35%. Once Marvell is firing on all cylinders, the stock could soar, so now is an excellent time to buy shares.
John Ballard has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends Marvell Technology. The Motley Fool has a disclosure policy.
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