Potential Chip Stocks Predicted to Soar by 2025, as Perceived by Wall Street Analysts
The semiconductor sector has witnessed considerable growth over the past few decades. Demand for chips can dip, especially during economic downturns, but historical data shows that advanced technologies and devices necessitate more powerful processors, leading to an escalating demand curve. In the near future, artificial intelligence (AI) is predicted to remain a significant booster for prominent chip suppliers' sales.
According to IDC's latest statistics, the semiconductor market is forecasted to increase by 15% in 2025, primarily due to AI demand. This potentially opens up profitable buying opportunities for stocks that have recently experienced price depreciation.
Two stocks gaining recognition on Wall Street are Advanced Micro Devices (AMD 0.10%) and Micron Technology (MU -1.32%). These stocks are currently trading at a discount from their previous highs yet have recorded impressive revenue growth in the data center market.
Analysts estimate an approximately 55% rise in AMD's share price, which is currently around $121, and a 53% surge in Micron's share price, now hovering just under $87. Let's delve deeper into these companies to determine if it's wise to invest based on Wall Street's expectations.
Advanced Micro Devices anticipates increased demand
Over the past few years, AMD's shares have delivered substantial returns. AMD has made significant strides in the server market, dramatically reducing Intel's market share in central processing units (CPUs) employed in servers from the single digits to 34%.
Additionally, AMD sees strong demand for its graphics processing units (GPUs) in the data center market, a driving force that could push the stock higher in 2025. Despite subpar results in gaming and industrial markets, AMD's impressive data center growth contributed to double-digit revenue growth in Q3 compared to the previous quarter. Analysts anticipate AMD to report a 13% increase in revenue for 2024, according to Yahoo! Finance.
The future may see even more growth if demand in other sectors picks up. For instance, AMD's embedded chip revenue, including sales to industrial markets, dropped 25% year over year in Q3, but this segment's revenue increased 8% compared to the preceding quarter.
At its current share price, AMD is trading at around 23 times the 2025 consensus earnings estimate, a price point that aligns with Wall Street's price target.
In 2025, AMD expects the AI accelerator market, or GPUs, to expand beyond 60% annually, reaching $500 billion by 2028. This expanding market coupled with above-average profit margins from these processors should allow earnings to grow faster than revenue.
Analysts project AMD to increase earnings annually at a rate of 41%. For 2025, the Street is anticipating earnings to reach $5.13. If AMD's stock maintains its current price-to-earnings multiple, the share price could climb in tandem with earnings, reaching Wall Street's price target of $184.
Of course, a sudden downturn in the chip industry could stifle AMD's momentum, preventing the stock from achieving its full potential. Yet, given the current share price discount from previous highs, there exists an attractive risk-reward setup for AMD investors heading into 2025.
Micron Technology's low valuation is alluring
Micron Technology is a prominent supplier of memory and storage solutions for data centers, original equipment manufacturers (OEMs), and consumer markets. The stock has shown steady growth since hitting its 2022 bottom, with the share price increasing by 71%. However, the stock is currently trading at a discount from its past highs due to weaker demand for dynamic random access memory (DRAM) this year.
Micron recently released its fiscal first-quarter results, which included a modest outlook, causing the stock to decline once more. Sales to data centers soared 400% year over year and 40% compared to the previous quarter, comprising more than half of Micron's overall revenue.
Micron also announced that its high-bandwidth memory (HBM) shipments exceeded expectations. HBM revenue more than doubled compared to the previous quarter. However, company management issued a softer than expected outlook for fiscal Q2, blaming weak consumer-related market demand for the shortfall. They expect the inventory adjustment to be completed soon.
Based on its revised projections, Micron still forecasts record revenue and positive free cash flow for fiscal 2025. The stock appears to be undervalued at its current price, but there is a potential risk of a value trap. The issue lies in Micron's inconsistent operating history, showing fluctuating earnings per share (EPS) and free cash flow due to competition within the memory market.
At its current share price of $86, Micron's stock is trading at around 10 times this year's earnings estimate and 6.6 times fiscal 2026 estimates, a set of tempting low valuation multiples. However, given the unpredictable market conditions, AMD appears to be the wiser investment choice for reaching Wall Street's 2025 price target. Micron's latest financial report serves as a reminder that multiple factors impact its product demand, making it challenging to accurately value the company.
Investors looking to diversify their portfolio may find opportunities in the semiconductor market, with IDC predicting a 15% increase in the market by 2025 due to AI demand. This could potentially provide high returns for stocks that have recently experienced price depreciation, such as AMD and Micron Technology.
In the context of investing, diversification is an essential strategy to manage risk and potentially enhance returns. With the semiconductor market forecasted to grow significantly due to AI demand, investors may consider allocating a portion of their portfolio to companies like AMD and Micron, given their current discounted prices and potential for revenue growth.
