Nvidia and this AI chip stock remain Top Picks at BofA

As chip stocks continue to rally, the spotlight remains firmly on industry giants like Nvidia (NASDAQ:NVDA) and other AI-focused chip companies. Amid this surge, Bank of America has reaffirmed its confidence in the prospects of Nvidia and another AI chip stock, underscoring their status as top picks.

Rally in AI chip stocks

The surge in AI chip stocks has been driven by several compelling factors. Over the last 12 months, the SOX ETF witnessed a 57.75% increase, underscoring the red-hot nature of the semiconductor industry, particularly for the names benefitting from the artificial intelligence surge.

Stocks such as NVIDIA and Advanced Micro Devices (NASDAQ:AMD) have seen their share prices skyrocket. For example, AMD is up 25% in 2024 and more than 87% in the last 12 months, while NVDA has gained 83.5% this year and an enormous 236.8% in the last 12 months.

In a recent note, Melius analysts raised the price target on AMD to $265 from $192, maintaining a Buy rating. They told investors that AMD’s stock is “Looking Like the ‘Nvidia-Mini,’” but they warned investors not to sell their Nvidia shares.

“We don't believe AMD will have an adverse impact on Nvidia’s momentum as the TAM is larger and Nvidia is the industry’s driving force,” said the firm. “Nvidia continues to do AMD and everyone else a favor by expanding the market and driving awareness.”

Of course, the growth in many chip stocks is underpinned by the soaring global demand for semiconductor chips, which are essential in powering AI models and applications. The surge in AI chip stocks can be attributed to the continued advancement and adoption of AI technology across various industries.

The proliferation of AI applications, coupled with the unprecedented growth potential, has bolstered investor confidence in chip stocks, contributing to their impressive rally in recent times.

Nvidia and Broadcom are Top Picks at BofA

In a note to clients this week, analysts at Bank of America said Nvidia and Broadcom Inc (NASDAQ:AVGO) are their top picks in the US semiconductor space, noting that the adoption of accelerated/AI servers is a generational shift with NVDA and AVGO the leaders.

“However, we believe the rising tide – accelerator market ~2xing to $200bn over next 3 years – could create volatile but fruitful opportunities among the #2 vendors including Buy-rated: 1) MRVL (#2 to AVGO in AI networking, up and comer in custom chips), 3) MU (potential to rapidly expand high-bandwidth memory or HBM market share behind Korean peers), and 3) AMD (#2 GPU and #3 AI accelerator vendor),” wrote the bank.

They added: “Each “junior samurAI” trades interestingly at a valuation premium to its respective leader, so greater stock volatility is to be expected. However, as the leader expands the market TAM, the junior can likely continue to carve a profitable niche.”