With the AI boom, investors are searching for the next Nvidia (NASDAQ:NVDA). While there are some that could rival the tech giant, many chip stocks are unfortunately falling into the category of top chip stocks to sell.
There’s a reason why this secular growth trend has boosted NVDA more than threefold since the start of the year. Already capitalizing on rising demand for chips capable of running generative AI platforms, Nvidia is the undisputed first mover in this space. Comparable names are attempting to play catchup, but in the end may only (at best) derive a moderate benefit from this tailwind. That’s bad news for other AI chip stocks that have experienced high double-digit or even triple-digit rallies riding NVDA’s coattails.
Alongside this, there are semiconductor companies that, while not directly competing with Nvidia, and in some cases partnering with the company, that stand to derive modest-at-best benefits, or have other issues that outweigh the positives stemming from AI.
With this, let’s take a look at the seven chip stocks to sell due to NVDA’s AI dominance, and why exactly is it best to avoid these stocks.
Advanced Micro Devices (AMD)
As Nvidia’s key peer, many assume that the generative AI trend bodes well for Advanced Micro Devices (NASDAQ:AMD). This explains why shares in this popular chip play have also gotten out of their tech sell-off slump this year. Since Jan. AMD has rallied 73.3% higher.
However, this big run-up with AMD stock is bad news for investors that may be considering it “the next Nvidia” in terms of stock price performance. With this big jump in price, AI tailwinds have become strongly factored into its valuation. Perhaps, too strongly.
As I recently argued, capitalizing on AI remains a work in progress for AMD. My InvestorPlace colleague Dana Blankenhorn is even more pessimistic, arguing that playing catchup is a lot easier said than done. Put simply, expectations are already baked-in, and non-AI headwinds (weak demand in other end-user markets) persist. Steering clear of Advanced Micro Devices right now is the better move.
Globalfoundries (NASDAQ:GFS) is also one of the top chip stocks to sell. As Zacks Investment Research recently pointed out, both Nvidia and AMD (ironically GlobalFoundries’ former parent) are sticking with overseas contract manufacturers for the production of their advanced chips. Meanwhile, this foundry largely makes chips for the end user markets experiencing demand weakness right now.
This could change down the road. Geopolitical tensions may lead to a “re-shoring” of advanced chip manufacturing back to the U.S. That will of course be a positive for this company and for GFS stock. However, the possibility of this is hardly a reason to pay 29.5 times forward earnings for a foundry that’s anything but “crushing it” right now.
Selling chip stocks that are set to lose as Nvidia gains? Intel (NASDAQ:INTC) belongs at the top of that list. Sure, it’s old news that semiconductor “dinosaur” Intel has been losing out to its higher-flying chip rivals for years, resulting in sluggish growth.
Not only that, investors have clearly priced-in the impact of falling profitability (due to the current chip glut) into the price of INTC stock. Some contrarian investors have made this a bottom-fisher’s buy, on the view that Intel’s multi-billion gamble on becoming a chip foundry will pay off in a big way. However, as I pointed out recently, Intel’s chip foundry pivot is bound to disappoint.
Spending billions to penetrate this lower-margin, commodified industry isn’t likely to result in INTC getting out of its slump. Although it would still be a gamble, perhaps it would be better if Intel was making a big AI pivot instead.
Micron Technology (MU)
Why does the success of the AI chip first mover mean bad news for Micron Technology (NASDAQ:MU)? After all, does this maker of memory chips have an AI tailwind of its own? Yes, this is true. Last month, the company reported better-than-expected quarterly results, due to demand for memory chips in generative AI servers. However, MU stock is one of many chip stocks to sell, due to AI-related demand boosts being far outweighed by the continued slump in demand among other types of end users.
Memory chip demand challenges are expected to keep Micron in the red during both 2023 and 2024. While a rebound among non-AI end users, coupled with AI-related growth, could swing Micron back into the black by 2025, much of this may already be accounted for in MU’s valuation, following the stock’s more than 30% rise in price since Jan.
Qualcomm (NASDAQ:QCOM) is another chip stock that appears to be a potential AI winner on the surface. However, if you look closer, other weaknesses make it questionable as an AI play.
The mobile chip maker has hopped on the AI bandwagon, touting its potential to eventually become a leading supplier of AI-capable chips for smartphones and Internet of Things (or IoT) devices. Couple this potential, with the low valuation of QCOM stock (15 times forward earnings), and you may think that this is an AI bargain, hiding in plain sight.
However, there may be a good reason why QCOM is so cheap. At least, that’s the view of Louis Navellier and the InvestorPlace Research Team. In their view, there are numerous headwinds that will likely continue to outweigh Qualcomm’s pivot. Said issues could also weigh again on shares, making this a stock to sell before the next drop.
Samsung Electronics (SSNLF)
Samsung Electronics (OTCMKTS:SSNLF) technically trades in the U.S. over-the-counter (or OTC) market. However, don’t assume this means you can grab shares in this South Korean-based electronics giant, which is one of the largest manufacturers of advanced chips. There has not been a trade of SSNLF stock stateside since last Sept. More importantly, beyond the fact that you likely cannot buy Samsung Electronics if you can only buy U.S.-listed stocks, even if you can access the company’s South Korean-traded shares, you may want to consider this one of the chip stocks to avoid.
As The New York Times reported earlier this month, even as global investors pile into the stock, on the view that its “AI moment is here,” analysts are not so sure. It’s easy to see why, given that, similar to Micron, memory chip headwinds far outweigh any AI tailwinds for Samsung Electronics right now.
Taiwan Semiconductor (TSM)
Taiwan Semiconductor (NYSE:TSM) is another name you may question being a “stay away” chip stock due to Nvidia’s rise. After all, this is the contract manufacturer for Nvidia’s AI chips.
But while Nvidia is gaining big from off-the-charts demand, according to one analyst (JP Morgan’s Gokul Hariharan), this isn’t exactly a big bonanza for this top chip foundry. Per Hariharan, only 5% of the company’s revenue this year will come from making AI chips for Nvidia and other fabless chip companies.
That’s not all. Other factors call into question the made rush into TSM stock, which is up by 31.4% this year. Major issues loom over Taiwan Semiconductor, and not only the obvious geopolitical ones. As seen in TSM’s latest earnings, this is yet another chip stock where demand challenges in areas outside of AI fail to make up for the small demand boost related to the trend.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.