A Wall Street analyst on Wednesday initiated coverage of three semiconductor stocks with buy ratings, citing their exposure to the artificial intelligence boom. They included AI kingpin Nvidia (NVDA).
William Blair analyst Sebastien Naji started coverage of Nvidia stock with an outperform rating. He also put outperform ratings on industry peers Broadcom (AVGO) and Arm Holdings (ARM).
"Market leadership in GPUs (graphics processing units) and AI systems is driving industry-leading revenue and earnings growth (at Nvidia), which we view as sustainable," Naji said in a client note.
In addition to its semiconductor expertise, Nvidia has a deep software ecosystem and full-stack AI hardware solution, he said.
Risks for Nvidia include its exposure to China (20% of revenue), competition from customers building their own AI processors, and the growth of competing chip suppliers, he said.
Nvidia Stock Drops
On the stock market today, Nvidia stock fell 1.9% to close at 113.37.
In a positive sign, Nvidia stock is trading near its 50-day moving average line, a key support level.
One Nvidia competitor is Broadcom, which makes custom AI chips for Alphabet's (GOOGL) Google, Meta Platforms (META) and others.
Broadcom is targeting $12 billion in AI revenue in its fiscal 2024. Of that, roughly two-thirds is coming from its custom chip business and one-third is related to its Ethernet networking solutions, Naji said.
"We see room for continued steady growth going into fiscal 2025 and 2026 driven by increasing custom chip demand, improved software monetization, recovery in non-AI semis, and accelerating growth of Ethernet AI network fabrics built on top of Broadcom's networking solutions," Naji said.
On Wednesday, Broadcom stock slid 0.5% to close at 161.67.
Arm Is An Emerging AI Player
As for Arm, Naji sees the chip designer gaining ground in the data center and AI markets. The U.K.-based company already is a key player in smartphones, automotive and Internet of Things devices.
"Arm's royalty/licensing revenue model drives best-in-class profitability," he said.
On Wednesday, Arm stock rose 1.1% to close at 138.36.
Nvidia stock is on two IBD lists: IBD 50 and Leaderboard.
Broadcom stock also is on two lists: Big Cap 20 and Tech Leaders. Arm stock is on the IBD 50 and Tech Leaders lists.
