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Written by Jeremy Bowman for The Motley Fool->
Citrini Research gained attention for its dystopian blog about AI.
Now, it's suggesting buying the laggards in the semiconductor industry.
Edge AI could be the next breakthrough in the AI boom.
Citrini Research may not be the household name that Goldman Sachs, but the macro-focused research firm made a name for itself earlier this year with a blog post entitled, "The 2028 Global Intelligence Crisis."
That thought experiment outlined a theoretical dystopian future where AI destroys jobs and transforms the modern economy. The blog post also gave a convincing narrative of how software stocks could get upended by AI, and the software-as-a-service sector plunged on the news as it captured the zeitgeist of investor fear at the moment.
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Now, in a post on X, Citrini dropped a theory about how to find the top chip stocks, which is simply to look for the ones that haven't surged yet.
This is going to really upset some people but this is the part of the cycle where you can pretty much do a screen by sector = semiconductor, find the last names that haven't tripled this cycle yet and still trade at the lower end of historical valuation range and then just buy em
Based on the recent movement in the semiconductor sector, that theory makes sense.
Nvidia was the original flagbearer in the AI boom. However, last year, the momentum passed on to memory chip stocks like Micron, which has surged over the last year. More recently, it's shifted to CPU stocks like Intel, AMD, and Arm.
Intel's recent surge may offer the best evidence for why Citrini's theory could play out. The company has not yet reported particularly strong growth numbers, but a hint of turnaround was enough to make it bounce after its latest earnings report. Its revenue rose 7%, while it guided to 11% growth in the second quarter.
So what could be next? Let's take a look at some of the prospects according to Citrini's theory.
Out of 57 semiconductors with market caps above $300 million, according to astock screener only two have had negative returns over the last year. In fact, only two have gained less than 25% in the last year. Those are Wolfspeed (Nasdaq: WOLF) and Skyworks (NASDAQ: SWKS).
Wolfspeed may be best known for filing for bankruptcy last year, but after cutting its debt burden by 70% and extending debt maturities, the company has significantly improved its financial health, and the stock has surged over the last month along with the rest of the semiconductor industry.
The company is still losing money, and gross margin is well into the red at -27% in its just-reported third quarter. However, Wolfspeed is seeing growth in its AI data center applications business, which seems to be enough to drive its recent surge. Still, it remains a high-risk stock.
Skyworks has missed out on the semiconductor rally, as the company struggles to grow revenue, reporting essentially flat growth in its most recent quarter. The company is highly exposed to the smartphone market, which has been weak recently, though it could benefit from the growth of Edge AI, or AI in end-user devices like smartphones. If Edge AI takes off, Skyworks looks poised to capitalize.
Some other possibilities include Qualcomm (NASDAQ: QCOM), another leading provider of smartphone chips, which has started to surge recently. Qualcomm is expected to be a leader in Edge AI thanks to its Snapdragon platform, and the company is reportedly working with OpenAI to develop processors for "AI agent" smartphones. Like Skyworks, Qualcomm has also struggled to grow its revenue recently, but investors seem to see it catching AI tailwinds, in part because of the partnership with OpenAI.
Picking individual winners based on the set of laggards isn't easy, but the theory seems correct as AI is likely to lift edge chip companies as well as others that have yet to feel the tailwinds from the new tech boom.
As the recent surge in Qualcomm, as well as chip stocks like Texas Instruments and GlobalFoundries, shows, a basket of chip stocks that have yet to surge could prove to be a winner over the next year or two.
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Jeremy Bowman has positions in Micron Technology and Nvidia. The Motley Fool has positions in and recommends GlobalFoundries, Micron Technology, Nvidia, Qualcomm, and Texas Instruments. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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