Semiconductor stocks are experiencing volatility this month, but investment firm Citi says there’s likely more upside to come, and any dips should be bought. Despite recent selling pressure from tariff concerns and mixed earnings, the Philadelphia Semiconductor Index ($SOX) should recover, driven by artificial intelligence (AI) strength and data points showing the analog recovery remains in its infancy.
Citi’s top pick is Microchip Technology (MCHP), alongside “Buy” ratings on Texas Instruments (TXN) and Analog Devices (ADI). These three stocks represent compelling opportunities as analog companies guided third-quarter sales up 6% quarter-over-quarter (QoQ) on average, with the analog upturn driven by low inventory, depressed margins, and improving demand.
The recent selloff was driven by tariff-related uncertainty and mixed earnings, with consensus estimates declining 6%. However, AI remains a bright spot, with companies like Meta (META), Microsoft (MSFT), and Alphabet (GOOG) (GOOGL) showing an $18 billion increase in capex for 2025.
While some tariff-related pull-ins are occurring in Auto and Industrial end markets, the fundamental analog recovery story remains intact, making this an opportune moment to buy quality semiconductor names on weakness.
Microchip Technology presents a compelling investment opportunity as the semiconductor industry recovers from its cyclical downturn. It delivered impressive second-quarter results with 10.8% sequential growth, driven by the strongest July bookings in three years and a book-to-bill ratio above 1.0 for consecutive quarters.
CFO Eric Bjornholt emphasized that March marked the bottom of the cycle, with distribution inventory normalizing after seven quarters of decline. The chipmaker is seeing strength in aerospace and defense, which account for 18% of the business, where Microchip serves as the largest semiconductor supplier to the U.S. Department of Defense. Data center demand is also recovering, and positions the company well for AI-related growth.
Microchip’s domestic manufacturing capabilities provide strategic advantages amid geopolitical tensions, with approximately 50% of wafer fabrication produced in U.S. facilities. It also expects gross margin expansion as inventory reserves and underutilization charges decline, targeting a long-term 65% gross margin from current 54% levels.
Analysts tracking MCHP stock forecast adjusted earnings to expand from $1.31 per share in fiscal 2025 (ended in March) to $3.35 per share in fiscal 2028. If MCHP stock is priced at 27x forward earnings, which is in line with its three-year average, it should trade around $90 in early 2027, indicating an upside potential of 30% from current levels.
Out of the 24 analysts covering MCHP stock, 16 recommend “Strong Buy,” one “Moderate Buy,” and seven say “Hold.” The average MCHP stock price target is $77.41, above the current price of $67.
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Texas Instruments stock should also be on your watchlist as the semiconductor giant navigates the cyclical recovery while maintaining its strategic advantages. TXN delivered strong second-quarter results with revenue of $4.4 billion, up 16% year-over-year (YoY), driven by broad-based growth across four of its five end markets, with industrial leading the charge at upper-teens sequential growth.
TXN’s unique positioning becomes valuable amid geopolitical tensions and trade uncertainties. Its substantial U.S. manufacturing footprint provides “geopolitically dependable capacity” that customers value.
Management emphasized that their flexible global manufacturing capabilities enable them to support customers regardless of evolving tariff environments, creating a competitive moat that few peers can match.
The financial strength remains impressive, with $1.9 billion in quarterly cash flow from operations and $6.7 billion returned to shareholders over the trailing twelve months through dividends and buybacks. With inventory positioned to support various recovery scenarios and lead times at low levels, TXN is well-prepared for accelerating demand.
A focus on long-term free cash flow per share growth, combined with its technology leadership and diverse end-market exposure, positions it favorably for sustained outperformance.
Out of the 35 analysts covering TXN stock, 14 recommend “Strong Buy,” 17 say “Hold,” one “Moderate Sell,” and three suggest “Strong Sell.” The average TXN stock price target is $210, above the current price of $205.
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Analog Devices delivered exceptional third-quarter results with revenue of $2.88 billion, exceeding expectations and marking 25% YoY growth with double-digit expansion across industrial, automotive, communications, and consumer segments. ADI’s industrial business, representing 45% of revenue, continues its accelerated recovery with 23% YoY growth and sequential expansion across all subsectors.
Its $1 billion automation franchise is positioned for explosive growth, with management targeting a doubling of this business by 2030, driven by AI-enabled robotics and demographic pressures. Particularly exciting is ADI’s content opportunity in humanoid robots, potentially worth several thousand dollars per unit, a 10x increase over current autonomous mobile robots.
The financial profile remains strong with 42.2% operating margins, $3.7 billion in trailing twelve-month free cash flow representing 35% of revenue, and $3.5 billion returned to shareholders.
ADI’s diversified manufacturing strategy and premium positioning in high-performance analog solutions provide competitive advantages during geopolitical uncertainties. At the same time, it maintains supply-constrained aerospace and defense operations, reflecting exceptional demand strength.
Out of the 33 analysts covering ADI stock, 21 recommend “Strong Buy,” three give it a “Moderate Buy,” and nine say “Hold.” The average ADI stock price target is $275, above the current price of $252.
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On the date of publication, Aditya Raghunath did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
