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Chip Stocks Soar as AI Demand and Mergers Drive Growth

AInvestMonday, Jan 6, 2025 2:03 pm ET
5min read


Chip stocks are trading higher today, driven by strong demand for AI-related chips and renewed optimism about mergers and acquisitions in the semiconductor industry. The semiconductor market is projected to grow 15% in 2025, led by AI demand, according to IDC's latest report. This growth is being fueled by the increasing demand for powerful processors required by advanced devices and technologies.



Advanced Micro Devices (AMD) is one of the leading beneficiaries of this trend. The company expects the market for AI accelerators, or GPUs, to grow over 60% annually to reach $500 billion by 2028. AMD's strong performance in the data center market, driven by its GPUs, is expected to catapult the stock higher in 2025. Despite soft results in gaming and industrial markets, AMD's growth in the data center helped drive double-digit revenue growth in Q3 over the year-ago quarter. Analysts expect AMD to report year-over-year revenue growth of 13% for 2024, with the potential for accelerated growth in 2025 if demand in other segments picks up.



Micron Technology (MU) is another semiconductor stock that has been benefiting from strong demand. The company's high-bandwidth memory (HBM) shipments were ahead of expectations, with HBM revenue more than doubling over the previous quarter. This growth was driven by strong demand from data centers, which now make up over half of Micron's total revenue. Despite a soft outlook for fiscal Q2, Micron still expects to achieve record revenue and positive free cash flow in fiscal 2025. The stock looks cheap at these lower share prices, but there is a risk that it could be a value trap due to Micron's inconsistent operating history.



The recent rally in chip stocks has also been driven by renewed optimism about mergers and acquisitions in the semiconductor industry. Microsoft's plan to invest $80 billion in AI-enabled data centers in fiscal 2025 has spurred bets that semiconductor demand will remain strong. Additionally, Foxconn's record revenue for the fourth quarter, driven by strong demand for AI servers, has added to the overall euphoria in the chip sector. Nvidia, a leading AI chipmaker, has also seen enormous demand for its AI chips, despite a slowdown in revenue growth in other segments.

While geopolitical tensions have not been explicitly mentioned as a driving factor in the recent chip stock rally, they can generally impact market sentiment and stock performance. However, the provided materials do not attribute the rally to geopolitical tensions.

In conclusion, the recent rally in chip stocks is being driven by strong demand for AI-related chips, renewed optimism about mergers and acquisitions, and the overall growth potential of the semiconductor industry. AMD and Micron are well-positioned to benefit from these trends, with AMD's GPUs and Micron's HBM shipments driving growth in the data center market. Despite potential risks and challenges, the favorable risk-reward setup for AMD investors and the cheap valuation of Micron make these stocks attractive buying opportunities. As the semiconductor industry continues to grow, investors should keep a close eye on these and other chip stocks for potential investment opportunities.
Disclaimer: the above is a summary showing certain market information. AInvest is not responsible for any data errors, omissions or other information that may be displayed incorrectly as the data is derived from a third party source. Communications displaying market prices, data and other information available in this post are meant for informational purposes only and are not intended as an offer or solicitation for the purchase or sale of any security. Please do your own research when investing. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit, or protect against loss in a down market.