Barclays upgrades Lumentum, cuts Allegro, Penguin before chip earnings

Investing.com -- Barclays turned more selective on U.S. semiconductor stocks ahead of the second-quarter earnings season, upgrading Lumentum Holdings while downgrading Allegro MicroSystems and Penguin Solutions, saying strong artificial intelligence-related gains have left limited room for further upside across much of the sector.

The brokerage upgraded Lumentum to Overweight from Equal Weight, citing improving confidence in demand for AI networking components and stronger earnings potential. It also reiterated Overweight on Credo Technology and maintained Equal Weight on Astera Labs despite raising its price target, reflecting expectations that AI spending will remain a key growth driver.

The rating changes underscore Barclays' view that while AI infrastructure spending continues to support the semiconductor sector, rich valuations have raised the bar for earnings-driven upside. The brokerage favors companies with clearer exposure to AI networking demand, while cautioning that stocks trading on longer-term themes such as robotics and enterprise AI may have moved ahead of their near-term fundamentals.

Barclays downgraded Allegro MicroSystems to Equal Weight from Overweight, arguing that the stock's valuation already reflects optimism around its data center opportunity while its core automotive business remains weak. The bank said data center revenue is growing rapidly but is unlikely to fully offset sluggish auto demand in the near term, while meaningful robotics revenue is not expected until around 2030.

The brokerage also cut Penguin Solutions to Underweight from Equal Weight, saying the stock's sharp rally has outpaced fundamentals. Barclays said the company's recent earnings strength has been driven primarily by higher memory prices rather than sustainable growth in advanced computing, while emerging opportunities such as Compute Express Link (CXL) and enterprise AI are still too early to justify its premium valuation.

Looking across the sector, Barclays said investor expectations heading into earnings remain elevated after a strong first half driven by AI infrastructure spending. While demand for memory, optics and AI networking continues to improve, the firm warned that many semiconductor stocks already price in optimistic growth assumptions, making it harder for earnings results alone to drive another leg higher.

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