AI growth propels semiconductor stocks to new highs

Key Points

• Semiconductor stocks, on a long-term uptrend since October 2022, are continuing their rally.
• Taiwan Semiconductor kicked off a fresh bout of buying after providing a higher-than-expected full-year outlook on AI-related revenue.
• Chip gear maker ASML gapped up after saying it expected 2024 to be a year of setting up for bigger increases in 2025. 

Semiconductor stocks are on a long-term uptrend that began on October 22, with analysts seeing more room for the sector to run.

Plenty of recent developments have investors smashing the "buy" button. 

Taiwan Semiconductor Manufacturing Co. Ltd. NYSE: TSM stock gapped up nearly 10% on January 18 after trouncing earnings and sales views. More importantly, thanks to AI-related revenue, management provided a full-year outlook higher than analysts expected.

The Taiwan Semiconductor chart shows the stock gapping out of a cup-with-handle base, advancing 13.18% in the past week. 

Wall Street expects the chipmaker to grow earnings by 19% this year, and another 25% in 2025. 

Investors rewarding AI revenue, not potential

Investors have become more picky about which companies they'll reward for having the potential to grow because of AI. For example, Wall Street is becoming skeptical of Palantir Technologies Inc. NYSE: PLTR, with one analyst saying its near-term AI revenue has been overhyped.

However, chipmakers and chip designers are a different story, as they're currently selling products to meet the increasing demand for AI applications. 

As AI expands across various industries, demand for high-performance chips to support complex computing tasks continues to grow.

Even as end-users like Microsoft Corp. NASDAQ: MSFT and Alphabet Inc. NASDAQ: GOOGL get into the business of making their own AI chips, there's plenty of growth for traditional industry players.

OpenAI forming chip manufacturing network?

According to a January report from Bloomberg, Sam Altman, the CEO of Microsoft-backed OpenAI, is discussing raising billions to form an AI chip venture. Altman is reportedly interested in creating a network of factories worldwide, in partnership with "top chip manufacturers."

The iShares Semiconductor ETF NYSEARCA: SOXX is up 10% in the past week, building on its one-year gain of 54.76%. 

Circling back to Taiwan Semiconductor's news, the company is not part of the US chip index tracked by the ETF, but its news sent other industry stocks into rally mode.

The largest holdings in the SOXX ETF are Advanced Micro Devices Inc. NASDAQ: AMD, Broadcom Inc. NASDAQ: AVGO, Nvidia Corp. NASDAQ: NVDA, Qualcomm Inc. NASDAQ: QCOM and Intel Corp. NASDAQ: INTC. 

Other chip stocks in bullish trends

Those stocks are all up 6% or more in the past five sessions, with other chip industry stocks such as Applied Materials Inc. NASDAQ: AMAT, Lam Research Corp. NASDAQ: LRCX, Micron Technology Inc. NASDAQ: MU, Analog Devices Inc. NASDAQ: ADI, Texas Instruments Inc. NASDAQ: TXN and ASML Holding NV NASDAQ: ASMLalso in bullish trends. 

Taking a look at that last stock, Netherlands-based ASML, which designs and manufactures lithography machines for the semiconductor manufacturing process, reported fourth-quarter and full-year results on January 24. 

The company beat analysts's views, and shares soared 8.85% in the session, adding another 2.57% the following day.

In the earnings release, CEO Peter Wennink threw some cold water on rapid-growth expectations, but that clearly hasn't deterred investors.  

ASML manages expectations ahead of a growth spurt

"Although our customers are still not certain about the shape of the semiconductor market recovery this year, there are some positive signs," he said. "Industry end-market inventory levels continue to improve, and litho tool utilization levels are beginning to show improvement. Our strong order intake in the fourth quarter clearly supports future demand." 

Wennink added, "In spite of the positive signs as described above, we maintain our conservative view for the total year and expect 2024 revenue to be similar to 2023. We also expect 2024 to be an important year to prepare for significant growth that we expect for 2025."

While Wennink is trying to manage investor expectations, post-earnings results thus far indicate investors are taking a longer view, hoping to grab shares before a run-up. 

Following the upbeat guidance from Taiwan Semiconductor, which happens to be ASML's biggest customer, signs abound that the entire industry is gearing up for more growth.