Citi says buy these 3 chip stocks on pullback

Investing.com -- Citi is urging investors to buy three semiconductor stocks after a sharp sector selloff, arguing that the supportive broader industry backdrop remains largely intact.

The Philadelphia Semiconductor Index (SOX) is up nearly 60% year-to-date versus the S&P 500’s 9% gain, but has fallen 21% quarter-to-date while the S&P 500 has been roughly flat, as chip stocks "ran into high investor expectations," Citi analysts said.

Fundamentally, the analysts said data center demand, which represents 34% of the semiconductor total addressable market, remains strong, auto and industrial demand continues to recover, while consumer demand from PCs and handsets "continues to weaken due to memory cost inflation and supply constraints."

Citi noted that 2026/2027 consensus EPS estimates from companies that have reported second-quarter results so far are up 9%/6% on average for semiconductor companies and 10%/11% for semiconductor equipment makers, a slowdown from the first quarter’s 15%/12% pace for semis, while equipment makers held steady. As a result, the analysts said they prefer "semi caps to semis on higher estimate revisions driven by capex hikes."

Against this backdrop, the analysts said they are buyers of AMD, Texas Instruments, and Applied Materials, the last of which gets a positive catalyst watch ahead of its August 13 earnings.

In the memory space, Citi said Korean manufacturers posted mixed operating profits depending on their HBM versus commodity DRAM exposure, with DRAM average selling prices (ASPs) up mid-40% quarter-over-quarter and NAND ASPs up high-60% in the second quarter.

DRAM makers expect the supply shortage to intensify into 2027 and persist beyond 2028, with Samsung planning to allocate 60-70% of capacity to long-term agreements versus Micron’s 40%. Citi removed its catalyst watch on Micron given the mixed results.

In analog semis, Citi pointed to a broad-based recovery, with industrial demand growing roughly 30-35% year-over-year, automotive up 12-15%, and personal electronics up 6-8%. Companies have raised prices to offset input cost inflation, and lead times are extending — some products now exceed 16 weeks — while customer escalations have doubled.

Citi expects Analog Devices, ON Semiconductor and Microchip to show similar trends and remains a buyer of Texas Instruments, its "top analog pick," citing its manufacturing capacity advantage.

Further, the Wall Street firm raised its 2026/2027 capex growth outlook for the "Big Five" cloud providers to +90% and +46% year-over-year, respectively, following June-quarter results. Alphabet raised its 2026 capex guidance to $195-205 billion, more than double last year, while Amazon lifted its guide to $220 billion from $200 billion.

Citi called this backdrop "supportive" of its positive stance on compute semiconductors and remains a buyer of AMD, its top pick, on GPU/CPU share gains.

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