The Case for Buying Semiconductor Stocks at a Pullback: UBS and AI Megatrends

The semiconductor sector, long a cornerstone of technological progress, is now at the epicenter of the AI revolution. As global AI capital expenditures surge toward $375 billion in 2025 and $500 billion in 2026, the demand for advanced chips is reshaping the industry’s landscape [1]. Yet, near-term volatility—driven by regulatory hurdles and geopolitical tensions—has created a compelling opportunity for investors to capitalize on strategic entry points in a high-conviction growth sector. UBS’s latest research underscores this duality: while challenges like U.S. export restrictions and equity stake demands loom [2], the long-term fundamentals for semiconductors remain robust.

AI-Driven Growth: A Structural Tailwind

The AI megatrend is no longer speculative—it is a structural force. UBS estimates that AI infrastructure spending will account for 50% of global tech capital expenditures by 2026, up from 33% in 2024 [3]. This shift is being fueled by cloud giants like Microsoft and Meta, whose Azure and AI-driven platforms are already generating 39% year-over-year revenue growth [4]. For semiconductors, this means sustained demand for GPUs, memory chips, and specialized AI accelerators. UBS’s top picks—Texas Instruments, Infineon, and Renesas—reflect this trend, with all rated “Buy” for their exposure to automotive and industrial AI applications [5].

However, the sector’s growth is not without friction. U.S. chipmakers like NVIDIA and AMD face margin pressures from mandatory revenue-sharing agreements with the government to secure China export licenses [1]. Meanwhile, the U.S. Commerce Department’s potential equity stakes in CHIPS Act beneficiaries could further complicate capital allocation [2]. These headwinds, while significant, are viewed by UBS as temporary disruptions rather than existential threats.

Strategic Entry Points: Balancing Caution and Conviction

UBS’s valuation analysis highlights a key opportunity: analog semiconductors are trading at a forward P/E of 20x for 2026, slightly above their 10-year average [5]. This suggests undervaluation relative to long-term growth prospects. For instance, SiTime—a leader in MEMS timing solutions—has been singled out as a high-conviction play. UBS analyst Timothy Arcuri forecasts 36% revenue growth in 2026 and 30% in 2027, driven by design wins with Apple and NVIDIA [6]. With AI-related revenue projected to account for 35% of SiTime’s total by 2027, the stock offers asymmetric upside.

UBS also advocates for a “rebalancing” strategy, urging investors to shift exposure from overvalued AI leaders to undervalued laggards. For example, Nordic Semiconductor—a former “Neutral” rated stock—was downgraded to “Sell” despite a raised price target, reflecting concerns about waning demand from Apple and Logitech [7]. Conversely, Applied Materials (AMAT) and ON Semiconductor (ON) present mixed signals: while AMAT’s price target was raised, ON’s was cut to $50 due to SiC business challenges in China [8]. These divergences highlight the need for granular stock selection.

Navigating Volatility: A Playbook for 2025

UBS’s July 2025 strategy emphasizes structured investments during pullbacks. With global tech earnings projected to grow 15% in 2025 [3], the firm recommends using dips to add exposure to high-quality names with strong operational execution. This includes capital preservation strategies like put-writing and short-term hedges against macroeconomic risks, such as potential semiconductor tariffs [9].

The timing is critical. UBS warns of an August 2025 pullback driven by profit-taking after a strong 2024 rally, exacerbated by weak manufacturing data and dollar volatility [10]. For investors, this creates a window to enter the sector at discounted valuations. The semiconductor industry’s forward P/E of 24x—below historical peaks but still elevated—suggests that while the sector is not cheap, its earnings momentum justifies the premium [11].

Conclusion: A Sector Worth the Risk

The semiconductor industry’s role in enabling AI adoption is irreplaceable. While near-term regulatory and geopolitical risks cannot be ignored, UBS’s research paints a picture of a sector where long-term growth far outweighs short-term turbulence. By focusing on high-conviction names like SiTime, rebalancing AI exposure, and leveraging pullbacks through structured strategies, investors can position themselves to benefit from the AI megatrend’s next phase. As UBS aptly notes, “The future belongs to those who build it—and the tools to build it are silicon-based.”

Source:
[1] Daily: Raising our tech forecasts amid solid results [https://www.ubs.com/global/en/wealthmanagement/insights/chief-investment-office/house-view/daily/2025/latest-31072025.html]
[2] Daily: What tech pressure says about the AI trade [https://www.ubs.com/global/en/wealthmanagement/insights/chief-investment-office/house-view/daily/2025/latest-20082025.html]
[3] CIO trims 2025 earnings growth forecast for global tech [https://www.ubs.com/us/en/wealth-management/insights/article.2159175.html]
[4] UBS says this chip stock will be the fastest-growing over the next few years [https://www.cnbc.com/2025/08/14/move-over-nvidia-ubs-says-this-chip-stock-will-be-the-fastest-growing-over-the-next-few-years.html]
[5] Automotive semiconductor cycle gains momentum [https://www.investing.com/news/stock-market-news/automotive-semiconductor-cycle-gains-momentum-ubs-reiterates-positive-stance-93CH-4212185]
[6] UBS's July 2025 Top Stock Picks [https://www.ainvest.com/news/ubs-july-2025-top-stock-picks-strategic-guide-navigating-sector-rotation-ai-driven-growth-2507]
[7] UBS cuts Nordic Semiconductor to “sell” [https://www.investing.com/news/stock-market-news/ubs-cuts-nordic-semiconductor-to-sell-warns-of-fading-growth-in-2026-4219234]
[8] UBS lowers ON Semiconductor stock price target [https://www.investing.com/news/analyst-ratings/ubs-lowers-on-semiconductor-stock-price-target-to-50-on-sic-business-concerns-93CH-4170633]
[9] Daily: Markets on risk watch amid stock gains [https://www.ubs.com/global/en/wealthmanagement/insights/chief-investment-office/house-view/daily/2025/latest-08082025.html]
[10] UBS Flags August Stock Pullback [https://www.ainvest.com/news/ubs-flags-august-stock-pullback-overvaluation-profit-pressures-2508/]
[11] Will AI demand be sufficient to justify the investment? [https://www.ubs.com/global/en/investment-bank/insights-and-data/2025/will-ai-demand-be-sufficient.html]