Semiconductors: A key sector for AI’s continued growth?

Chip giant Nvidia (NVDA) has been at the center of the market rally, reaching record highs in February. However, as more investment is poured into AI, some fear the potential for a bubble to form.

Citi Head of US Semiconductor Research Chris Danely joins Yahoo Finance to share his perspective about the AI sector's continued room for growth, despite the fact that AI hardware like semiconductors historically experiences cyclical growth.

Danely is particularly bullish on semiconductors, sharing his top pick within the sector: "We've all identified Nvidia as the clear AI leader. I guess in this sort of instantaneous market, they're almost yesterday's news in terms of AI. What we think is going to be the next group of semiconductors or product of semiconductors that's going to have the AI mentioning is going to be memory and specifically DRAM. So, clearly, there's a lot of graphics chips going into it, clearly there's a lot of ethernet chips that Broadcom (AVGO) makes...We think that's the next positive catalyst for the AI market, but you're just starting to see memory come into play as, wow, we need more of this, this is in shortage, and Micron (MU) is the top pick on the DRAM space for us.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video transcript

SEANA SMITH: The AI media here really pushing, really driving the market action. You've got the NASDAQ coming off that record high. NVIDIA shares up just about 75% so far this year. Our next guest saying that there's more room to run in the AI trade and he's wildly bullish on semiconductors. Let's bring him in.

We have Chris Danely. He's a Citi's head of US semiconductor research joining us now. And Chris, I think many investors are at home right now asking themselves whether or not we're starting to see a bubble form in the AI trade. What do you think?

CHRIS DANELY: Yeah, good question. So I hate admitting it, but I've been covering semis for 30 years. And I would say that the last time we saw a single-application drive, what we call TAM expansion in semis, it's actually expanding the semiconductor market, was about 25 years ago with the advent of the internet. And I think that's probably the closest thing to what AI has done.

Now, the internet eventually led to a bubble as well, but that went on for a good two or three years. And you know, semis, I will never go out and say that they are no longer cyclical. So at some point, this party will end probably in a lot of tears. But for right now, we can't really see the end of it.

I think what's going on is that entities, whether it's a government, a university, a business, are buying AI product, whether it's BD, or AMD, or Micron, or Broadcom, or what have you. And they've either bought just a little bit of semis before or they really haven't bought them. And again, we haven't seen this-- I hate using superlatives because we get a lot of superlatives thrown around in semis and they don't actually work. But we haven't seen anything like this in probably a quarter century.

BRAD SMITH: Who are the first departures from the AI party if we do see a bubble burst?

CHRIS DANELY: That's a good question. So as we've seen, what goes up must come down. And I would say that, you know, in covering semis for three decades, when you do have a downturn in any particular end market, witness the downturn we had last year.

Now, the stocks inflected the year before, but the downturn we had last year it impacts everybody. So whenever the party ends, I really would not harbor any illusions about any of these stocks being able to get through it unscathed. But we really don't see any end in sight. So I think we've got a long way to go until we're going to start ringing the alarm bells or even hearing a tinkling of bells out there in terms of AI.

SEANA SMITH: And Chris, you put it quite simply in your note saying that you're widely bullish still on semiconductors. What's your top pick within that sector?

CHRIS DANELY: Top pick is Micron. So I think, you know, we've all identified NVIDIA as the clear AI leader. I guess in this, sort of, instantaneous market, they're almost yesterday's news in terms of AI.

What we think is going to be the next group of semiconductors or product of semiconductors that's going to have the AI mentioning is going to be memory and specifically DRAM. So clearly, there's a lot of graphics chips going into it. Clearly, there is a lot of Ethernet chips that Broadcom makes going into it. By the way, Broadcom announces on Thursday. We think that's the next positive catalyst for the market.

But you're just starting to see memory come into play as, wow, we need more of this. This is in shortage. And Micron is the top pick on the DRAM space for us.