Geopolitics, Tariffs Offset AI Prospects in Semis: 2 Stocks

Companies in the Semiconductor – General industry are at the forefront of the ongoing technological revolution based on HPC, AI, electrified and automated driving, IoT and so forth. The semiconductors they produce enable the cloud to function and help analyze data into actionable insights that can be used by companies to operate more efficiently. Therefore, the long-term outlook can only be considered bright.
 
In the immediate future, however, challenges appear to be mounting. While geopolitical instability and the arms race among nations may sound like positive drivers for some, actual wars disrupt supply chains, delay deliveries and drive up prices.

The U.S. government’s tariffs at this juncture will only exacerbate the inflation on end products using semiconductors and potentially disrupt trade routes, resulting in more of the same challenges. Given the growing uncertainty, we are concerned that share prices continue to soar, leading to a rich valuation. Despite this, we continue to like NVIDIA Corp. NVDA and think that Texas Instruments TXN is also worth tracking.
 
The latest data coming out of WSTS, which is also typically quoted by the Semiconductor Industry Association (SIA), has global semiconductor sales growing 11.2% this year, on top of a 19% increase in 2024. IDC also expects double-digit growth, with AI workloads driving demand for high-end logic process chips and high-priced high-bandwidth memory (HBM).

Advanced nodes (below 20nm) capacity is expected to increase by 12% with utilization still remaining above 90%. Most of the action is expected to be in Taiwan, U.S. and Korea. Mature nodes utilization is expected to go from 70% in 2024 to above 75% this year. Wafer production is expected to increase 7%. G8
arter expects 11.8% growth in 2025 followed by 11.2% growth in 2026 despite increasing geopolitical risks and the impact of U.S. tariffs, which are likely to increase logistical challenges.
 
As far as end-markets are concerned, PC growth will also be driven by AI and the end of support for Windows 10. Both commercial and enterprise deployment should increase despite tariffs driving inflation and increased chances of a global recession dampening demand.

Driven by Internet connectivity across the developed and developing worlds and supportive technology such as sensor networks and AI adoption, 5G and edge computing, the IoT market should also grow steadily over the next few years. iMARC expects the industrial IoT (IIoT) segment alone to grow at a 12.7% CAGR between 2025 and 2033.

Gartner says that by 2025, 25% of industrial companies will either acquire or invest in an industrial IoT platform. AI and IoT will together continue to revolutionize industrial operations. AI will continue to drive major shifts in auto electrification, industrial automation, data center efficiency and more. The sky seems to be the limit for semiconductor growth.
 
The U.S. government’s target of reducing dependence on China, and onshoring projects with national security implications will shape the future of this industry.

About the Industry

The companies grouped under the Semiconductor – General category produce a broad range of semiconductor devices, both integrated and discrete, like microprocessors, graphics processors, embedded processors, chipsets, motherboards, wireless and wired connectivity products, DLPs and analog, serving multiple end markets. It includes companies like NVIDIA, Texas Instruments, Intel and STMicroelectronics.

Major Themes Shaping the Industry

• Artificial intelligence is the single largest driver of the industry because of the transformation it is bringing in efficiency, cost-effectiveness, automation, safety, environmental benefits and so forth. AI has become an imperative for effective competition, irrespective of the industry. Technology companies are building their own where possible and buying where it makes sense. For everybody else, this is technology they have to adopt. Moreover, the more the companies that use it, the more necessary it becomes. In this backdrop, data-intensive applications, advancements in machine learning algorithms and increasing urbanization, as well as dynamics in the data center, auto, healthcare, financial services and other markets are major drivers. The growth this is spurring in the semiconductor industry is likely to continue for years to come. 

• Current geopolitics is negative for growth. Geopolitical tensions are adding a dimension to semiconductor demand, as countries increasingly adopt the latest technology in defense, infrastructure and other critical applications. As defense spending accelerates the world over, particularly on fighter planes and unmanned aerial vehicles currently being used in military operations, demand for the most sophisticated underlying electronics will only go up. Tachnavio estimates that semiconductors used in the military and aerospace market will grow 6% between 2024 and 2029. However, war is not conducive to trade overall because of the disruptions in trade routes, uncertainty in demand and price escalation in key commodities. Therefore, ongoing tensions in Ukraine and the Middle East could actually dampen demand, raise prices or cause other disruption in the larger computing, consumer, data center, auto and industrial markets. China is an important angle in itself as it is the largest buyer of U.S. chips even as its technological advancements have put western countries, particularly the U.S. on edge. There is also considerable concern that all the most important leading-edge chips are currently made in Taiwan, a country that China threatens to annex. Since this has national security implications, there is an ongoing drive to onshore manufacturing. The CHIPS Act is facilitating the process.

• Notwithstanding the fact that the long-term prospects are extremely bright because the industry is on the building-block side of technology, making it crucial for the proliferation of the Internet and the ongoing broad-based digitization, there are some near-term issues. Macro concerns are mounting by the day. U.S. tariffs are expected to raise prices on all the consumer electronics, computing, data center, industrial and other applications of semiconductors, severely hitting consumer confidence, neutralizing the positive effects of relatively low inflation and a somewhat lower interest rate. The automotive electronics segment is an area of evolving needs, as the world continues to move toward EVs and hybrids. However, some recent trends indicate that customers are moving away from premium offerings. ADAS, infotainment and electronic control units (ECUs) remain attractive, with safety and fuel efficiency being top concerns. The increase in consumer confidence for May is mostly related to President Trump’s decision to pause some of the tariffs. Therefore, the trend is likely to turn negative going forward, which is not the best thing for consumption, including of expensive EVs. The adoption of automation and robotics across industrial operations is positive, but industrial markets are directly impacted by any macro slowdown.

• Semiconductor supply chains are adjusting. Efficient semiconductor supply chains based on the just-in-time model are no longer coveted, as the cost advantages they enable are not as important as resilience in times of unforeseen disruptions. Players continue to adjust for these external disruptions, such as COVID, wars and tariffs. This, along with other factors, such as the U.S.-imposed restraints on dealing with China has led semiconductor companies to diversify their supply chains and reduce their dependence on the country. This is an ongoing process that will take several years.

Zacks Industry Rank Indicates Deteriorating Prospects

The Zacks Semiconductor-General industry is a stock group within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank of #189, which places it in the bottom 23% of nearly 250 Zacks-classified industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates that near-term prospects are improving. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of 2 to 1.

An industry’s positioning in the top 50% of Zacks-ranked industries is normally because the earnings outlook for the constituent companies in aggregate is relatively strong. The opposite is true for stocks in the bottom 50% of industries. In this case, the aggregate earnings estimate for 2026 is up 26.5% from the year-ago level while the aggregate earnings estimate for 2027 is up 46.8% from last year. Very strong growth prospects for NVDA are pushing up the average in this case.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Stock Market Performance Remains Strong

Tracking the performance of the Zacks Semiconductor – General Industry over the past year shows that the industry has traded more or less in line with the broader Zacks Computer and Technology Sector and the S&P 500 index throughout the year, at times dropping below and at times pulling ahead.

The industry has gained 17.9% over the past year. The broader technology sector gained 9.6% while the S&P 500 index gained 10.3%.

One-Year Price Performance

Image Source: Zacks Investment Research

Current Valuation: Rich

On the basis of forward 12-month price-to-earnings (P/E) ratio, we see that the industry is currently trading at a 32.79X multiple, which is below its median value of 35.34X over the past year. However, since the S&P 500 trades at 21.89X and the sector trades at 26.20X, the industry appears significantly overvalued.

It’s worth noting that the industry has traded much closer to the sector in the last 10 years, trailing it at first then slightly beating it. But it has really pulled ahead from the middle of 2022, most likely because companies started scrambling to acquire the basic building blocks for AI, autonomous driving, defense and other mega trends driving the market today. 

Forward 12 Month Price-to-Earnings (P/E) Ratio

Image Source: Zacks Investment Research

2 Stocks To Consider

While macro and geopolitics increase uncertainty, the industry stands to benefit from any interest cuts this year, which typically drive more money into risky assets. Several of the technology heavyweights in this industry are the backbone of how computing is done these days, so we remain optimistic over the long run. The only stumbling block is the valuation. We continue to like NVIDIA and think that TXN is worth keeping an eye on: 

NVIDIA: Santa Clara, California-based NVIDIA Corp. provides graphics, and compute and networking solutions in the U.S., Taiwan, China and other markets. Its graphics processing units (GPUs) are the most popular in the gaming segment. NVIDIA is also at the leading edge of enterprise, data center, cloud and automotive deployments today.

Generative AI is driving exponential growth in compute requirements. Because NVIDIA’s accelerated computing is versatile, energy-efficient and has low total cost of ownership, companies are rapidly transitioning to its products to train and deploy AI. NVIDIA GPUs, CPUs, networking, AI foundry services and NVIDIA AI Enterprise software are all growth engines. They are opening up opportunities and leading to broad-based growth across geographies and markets.

AI and accelerated computing are quickly becoming integral to customers' innovation road maps and competitive positioning. The data center business is extremely strong, driven by demand for data processing, training and inference from large cloud-service providers and GPU-specialized ones, as well as from enterprise software and consumer Internet companies.

Some of its largest cloud customers include AWS, CoreWeave, Google Cloud Platform (GCP), Microsoft Azure and Oracle Cloud Infrastructure (OCI). Healthcare partners like IQVIA, Illumina, the Mayo Clinic and Arc Institute are using its products to advance genomics, drug discovery and healthcare. NVIDIA is also seeing momentum across professional visualization and automotive (recent collaborations include Toyota, Hyundai, Mercedes-Benz, Audi). The company also gives away billions to shareholders in dividends and share repurchases.

NVIDIA is moving some production to the U.S. It has commissioned more than a million square feet of manufacturing space to build and test NVIDIA Blackwell chips in Arizona and AI supercomputers in Texas.

The Zacks Consensus Estimate for 2026 (ending January) has gone from $4.18 30 days ago to the current level of $4.25 (up 1.7%). There’s a similar increase of 18 cents (3.3%) in the 2027 estimate. At current levels, analyst estimates represent a 51.4% increase in revenue and 42.1% increase in earnings for 2026 and a 25.2% revenue increase and 31.8% earnings increase in 2027.

The Zacks Rank #3 (Hold rated) stock is up 24.4% in the past year.

Price & Consensus: NVDA

Image Source: Zacks Investment Research

Texas Instruments, Inc. (TXN)

Dallas-based Texas Instruments is an original equipment manufacturer of analog and embedded processing chips for industrial, automotive, communications, enterprise and other applications.

While the US is its largest market, followed by Europe, it’s worth noting that China still accounts for nearly a fifth of its revenues, which could be at increasing risk given the current geopolitics.

As the pandemic and geopolitics impacted the chip supply chain, and the government incentivized American companies to reshore manufacturing, TI changed its manufacturing strategy from one that opportunistically used external capacity to one on the path to source more than 95% of its wafers internally, with more than 80% on 300mm, by 2030.

To this end, it expanded its internal manufacturing capacity in 2024, with tool installations continuing at two 300mm wafer fabs in Richardson, TX and Lehi, Utah. Another Lehi fab and a Sherman, TX fab are currently in prep.

The company is a beneficiary of the 25% investment tax credit related to some of its investments in U.S. semiconductor manufacturing (expected to continue on qualified investments up to 2034). It also has an agreement with the Department of Commerce to receive direct funding of up to $1.6 billion for the three large-scale 300mm wafer fabs currently under construction in Sherman and Lehi.

As may be expected, capacity expansion initially has a negative impact on margins, as capacity can only be filled over time. Until then, some underutilization charges are a given.

It is encouraging to note, however, that TI has also gradually increased the share of direct sales to customers, which improves insight into their projects and timelines, thus driving sales, customer penetration and market share gains. In 2024, around 80% of business came from direct customers.

With industrial and automotive markets accounting for around 70% of revenue, the growing electronic content in these applications, as well as the demand for sustainable growth hold promise.

In the last 30 days, the Zacks Consensus Estimate for 2025 increased by a penny while the estimate for 2026 did not change. Analysts currently expect revenue and earnings to grow a respective 20.6% and 6.7% in 2025 followed by a respective 8.7% and 12.9% in 2026.

In the past year, this Zacks Rank #3 stock gained 5.7%.

Price & Consensus: TXN

Image Source: Zacks Investment Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

 
Texas Instruments Incorporated (TXN): Free Stock Analysis Report
 
NVIDIA Corporation (NVDA): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research