Jefferies analysts have initiated coverage on the US semiconductors sector with a long-term bullish outlook, indicating that the current upcycle in the space is expected to be strong and lengthy.
Analysts note that historically, the market is still early in the cycle, being just 14 months removed from the lowest year-over-year growth point, compared to over 30 months in the past nine cycles, “implying 1 year+ of growth ahead.”
“We saw peak-peak Semi revenue growth of 20-40% over the last two cycles and our forecast includes 50% growth through '28 given the influx of $200B of AI spend, which suggests 30-60% upside remaining in the SOX based on historical cycle multiples,” they wrote.
In the note, Jefferies encouraged investors to buy the latest dip in AI stocks, after the latest earnings season brought “the first real pullback in the space.”
“After the big correction in 2022, the space has largely run, with the Compute and Semi Cap names up over 60% at the median,” Jefferies analysts noted.
“The recent pullback in AI/DC brings many of the more expensive names back into more reasonable territory,” they added.
The investment bank believes that AI investment is poised to grow significantly, potentially accounting for 25% of semiconductor revenues by 2027, up from 5% in 2022. With rising cloud capital expenditure budgets, the growth trajectory for AI remains robust.
While it’s premature to determine clear winners and losers within the AI sector, Nvidia (NASDAQ:NVDA) emerges as Jefferies' “favorite” pick, whose dominance across the entire ecosystem allows it to capture an increasing share of the market.
“We expect a strong ramp for the GB200 NVL 36/72, which includes NVDA Arm based CPUs and more networking, which admittedly would come at the expense of others,” analysts said.
Other two key themes highlighted by Jefferies in their newly initiated chip stock coverage include a preference for Analog over Semiconductor Capital Equipment (Semi Cap). Despite a flat performance year-to-date, Analog is seen as having substantial potential upside as it aligns with normalized trends.
Further, while Semi Cap faces risks associated with China, it is tracking better than expected. However, this sector presents less upside in terms of recovery compared to consensus forecasts.