The semiconductor industry has been a tale of two trajectories in 2024. On the one hand, companies riding the wave of artificial intelligence (AI) have seen explosive growth, driven by surging demand for high-performance chips in data centers and other cutting-edge technologies. On the other hand, segments like automotive and industrial chips have faced cyclical slowdowns and uneven demand as global economic uncertainties weigh on production and inventory cycles. Deutsche Bank anticipates a continuation of this trend next year.

“Looking into 2025, we expect ex-memory semi-revenue growth to accelerate to [roughly 16% year-over-year], albeit with the bifurcation theme persisting (AI up low teens, remainder of sector up [low-single-digit percentages]),” Deutsche Bank analysts told investors in a note. “In general, after a year of relative underperformance for the SOX (~-6% vs. S&P), and with fundamental growth likely improving both in magnitude and breadth, we are more constructive on the group than at this point a year ago, albeit with selectivity remaining paramount.”

Looking ahead to next year, Deutsche Bank identifies two emerging themes: “broad-based” companies are expected to experience improved growth, and the momentum from AI-related tailwinds is likely to continue. The firm highlighted Broadcom (AVGO) and NXP Semiconductors (NXPI) as two standout semiconductor stocks among its top picks for 2025. With that, let’s have a closer look at these stocks.

The Case for Broadcom Stock

Broadcom Inc. (AVGO) specializes in designing, developing, and supplying a range of semiconductor devices globally, focusing on complex digital and mixed-signal complementary metal oxide semiconductor-based devices and analog III-V-based products. Its market cap currently stands at $1.05 trillion.

Shares of the semiconductor firm have delivered outstanding returns in 2024, rallying 101.4% year-to-date.

Deutsche Bank’s View on AVGO Stock

Broadcom is one of Deutsche Bank’s top semiconductor picks for 2025. The firm noted that AVGO benefits from ongoing spending by hyperscalers and its role in developing application-specific integrated circuits for companies such as Google (GOOGL) and Amazon (AMZN), with their tensor processing units and Trainium2 chips, respectively.

“On the AI front, we expect GPU-based accelerators to deliver yet another year of outsized growth (led by NVDA, and somewhat AMD), with ASICs and Networking players also contributing (AVGO, NXPI, ALAB, etc.),” analysts at the firm said in a note.

Recent News for AVGO Stock

On Dec. 11, Broadcom stock climbed over 6% after The Information reported that Apple (AAPL) was working with the chipmaker on a server chip exclusively designed for artificial intelligence. According to the report, the new chip, internally code-named Baltra, will be ready for mass production by 2026. It will reportedly be manufactured using an advanced process from Taiwan Semiconductor Manufacturing Company (TSM), which produces chips for Nvidia (NVDA) and is an Apple supplier.

Partnering with Apple provides Broadcom the chance to secure a well-funded anchor customer and expand its product portfolio, particularly as the market for AI-capable chips is poised for rapid growth driven by advancements in AI technology.

Broadcom Pops After Q4 Results

On Dec. 12, Broadcom released a FQ4 earnings report that received a resounding cheer from investors, leading to a more than 24% surge in AVGO stock in the subsequent trading session.

Broadcom’s consolidated revenue grew 51.2% year-over-year to $14.1 billion, in line with Wall Street’s estimates. Also, its top line advanced 8% sequentially, indicating that demand continues to rise and that the VMware acquisition is not obscuring organic growth. 

AVGO experienced growth in both of its core businesses, particularly in Infrastructure Software, where revenues skyrocketed 196% year-over-year to $5.8 billion. This increase was primarily attributable to the contribution from VMware. At the same time, the company’s semiconductor segment saw a 12% year-over-year revenue increase to $8.2 billion, accounting for 59% of total quarterly revenue, bolstered by the continued strength of artificial intelligence. Notably, AI revenue surged by 150% year-over-year to $3.7 billion in FQ4. As a result, AI constituted 45% of the company’s semiconductor revenue and has maintained its substantial growth trajectory.

In terms of profitability, the company posted a non-GAAP gross margin of 77%, which remained stable quarter-over-quarter and expanded by 260 basis points from the year-ago quarter, effectively converting much of the revenue increase into income and cash flow further down the income statement. With that, its adjusted earnings stood at a record $1.42 per share, beating expectations by $0.03. AVGO also posted an adjusted EBITDA of $9.1 billion, with an adjusted EBITDA margin of 65%.

The chipmaker generated $5.5 billion in free cash flow in FQ4, resulting in an impressive free cash flow margin of 39%. Its strong free cash flow provides a solid foundation for attractive capital returns.

Looking ahead to fiscal Q1, the company projects revenue of $14.6 billion with an adjusted EBITDA margin of 66%, equating to $9.6 billion in adjusted EBITDA. This implies a 6% quarter-over-quarter growth in adjusted EBITDA, indicating continued demand for its products and solid growth.

AVGO Valuation, Dividend, and Analysts’ Estimates

Analysts tracking the company predict a 27.98% year-over-year growth in its adjusted EPS to $6.23 for fiscal 2025. Moreover, Wall Street expects AVGO’s FY25 revenue to grow 18.97% year-over-year to $61.36 billion.

Broadcom distributed a record $22 billion in cash to its shareholders in fiscal 2024, marking a 45% increase year-over-year, through dividends, buybacks, and eliminations. Notably, shares of AVGO currently yield a dividend of 0.94%. The company has boosted its dividend for 13 consecutive years, and on Dec. 12, Broadcom announced an 11% increase in its quarterly dividend to $0.59 per share, based on increased cash flows in FY24.

In terms of valuation, AVGO stock looks quite expensive at current levels, especially after its huge post-earnings run-up. The stock trades at 36.07 times forward adjusted earnings, well above the sector median of 26.25x and its five-year average of 19.56x. However, this valuation can be somewhat justified, given the company’s top-line momentum, strong free cash flow margins, and solid revenue guidance for the current quarter.

What Do Analysts Expect For AVGO Stock?

Broadcom stock has a consensus “Strong Buy” rating. Out of the 33 analysts covering the stock, 30 recommend a “Strong Buy,” and the remaining three assign a “Hold” rating. Notably, the stock trades at a premium to its mean price target of $196.55 and has a modest 6.8% upside potential to the Street-high price target of $240.00.

The Case For NXP Semiconductors Stock

With a market cap of $55.1 billion, NXP Semiconductors (NXPI) is a global leader in automotive chip solutions, encompassing radar systems, driver assistance features, and electrification. The company also supplies chips across business segments, including Industrial & IoT, Mobile, and Communication Infrastructure. Its products are utilized in a wide range of applications, from smartphones and 5G communications equipment to factory automation devices.

Shares of NXP Semiconductors have dropped 5.6% on a year-to-date basis, lagging behind its peers and the broader market. This underperformance was driven by a cyclical downturn in NXPI’s key end markets, specifically automotive and industrial microchips.

Deutsche Bank’s View on NXPI Stock

Deutsche Bank favors NXP Semiconductors, citing that expectations for the company are “at the lower end,” alongside structural improvements and relatively low valuations.

“For the broad-based names, cyclical bottoms were largely found in 2024, so the focus in 2025 will shift to the pace of recovery. On this topic, we expect improvement directionally, but remain conservative on the magnitude given macro, inventory, pricing headwinds,” the analysts wrote. 

Recent News for NXPI Stock

On Nov. 12, NXP Semiconductors introduced a pioneering wireless battery management system (BMS) solution featuring Ultra-Wideband (UWB) capabilities, drawn from one of the industry's broadest UWB portfolios. The new UWB BMS solution represents a significant advancement in addressing development challenges such as costly and complex manufacturing processes, thereby hastening the adoption of electric vehicles.

Using wireless solutions reduces the reliance on complex wiring harnesses within the battery pack and diminishes the necessity for error-prone manual effort during production. This enhancement makes the assembly of EVs more efficient and lowers overall lifecycle costs. Removing connectors and wiring between battery cells enhances energy density, a crucial factor in EV design and performance that enables longer driving ranges.

On Nov. 12, NXP Semiconductors unveiled the i.MX 94 family, the latest addition to its i.MX 9 series of application processors. These processors are designed for use in industrial control, programmable logic controllers (PLCs), telematics, industrial and automotive gateways, as well as building and energy control.

How Did NXPI Perform in Q3?

On Nov. 5, NXP stock fell over 5% after the semiconductor manufacturing and design company’s Q4 guidance fell short of expectations.

NXP Semiconductors’ third-quarter revenue dropped 5.2% year-over-year to $3.25 billion, in line with Wall Street’s and management’s expectations. The automotive business continued to encounter challenges due to inventory destocking and subdued consumer demand, especially in North America and Europe. During the quarter, NXP’s automotive segment, which represented 56% of total sales, experienced a 3.3% year-over-year decline. Industrial & IoT revenue decreased by 7.2% year-over-year, while communication infrastructure revenue fell by 19.3% year-over-year, driven by end-market cyclicality. 

However, due to management’s cost-cutting efforts, operating income did not decline alongside sales, remaining steady year-over-year at $990 million, which is a huge win for the company with high fixed costs. As a result, its adjusted EPS stood at $3.45, beating expectations by $0.02.

The bright spot of the quarterly report was the company’s progress in expanding its international manufacturing operations. On Aug. 20, ESMC, the joint venture between TSMC, Robert Bosch GmbH, Infineon Technologies (IFNNY), and NXP Semiconductors, commenced the initial construction phase of its first semiconductor fab in Germany. Furthermore, in September, Vanguard International Semiconductor and NXP Semiconductors announced that their VisionPower Semiconductor Manufacturing joint venture had received all required governmental approvals.

Now, let’s turn to the disappointing aspect of the report. The company projected Q4 revenue to be between $3 billion and $3.2 billion, representing a 9% year-over-year decline at the midpoint. This forecast fell short of the expected $3.36 billion, reflecting weakening demand and the absence of the previously anticipated rebound in the second half of 2024. During the earnings call, management predicted that the automotive segment would likely see a high-single-digit decline in Q4, as the industry continues to reduce inventories. Also, the IoT and industrial segment’s revenue is projected to drop by 20% due to sluggish industrial production. Additionally, NXP forecasts adjusted EPS to be between $2.93 and $3.33, with the midpoint of $3.13 significantly below the consensus of $3.62.

“Our guidance for the fourth quarter reflects broader macro weakness, especially in Europe and the Americas,” said NXP CEO Kurt Sievers. “We focus on managing what is in our control, enabling NXP to drive resilient profitability and earnings in an uncertain demand environment.”

NXPI Valuation, Dividend, and Analysts’ Estimates

According to Wall Street estimates, NXPI is expected to report a 6.96% year-over-year drop in its adjusted EPS to $13.03 in fiscal 2024, while revenue is projected to fall 5.03% year-over-year to $12.61 billion. Moreover, the company is expected to post roughly flat performance on both lines in FY25, with a return to growth projected in FY26 and beyond.

It is important to note that NXPI maintains its shareholder-friendly capital allocation policy. During the third quarter, NXP distributed $259 million in cash dividends and repurchased $305 million worth of its common shares. On Nov. 21, the company declared a quarterly cash dividend of $1.014 per share, in line with the previous, payable to its shareholders on Jan. 8. Its annualized dividend of $4.06 per share results in a dividend yield of 1.87%, which is higher than the sector median of 1.43%.

In terms of valuation, priced at 16.64 times forward adjusted earnings, NXPI stock trades at a discount compared to the sector median of 26.44x and its five-year average of 17.49x. With that, I believe the stock offers a solid risk-reward balance at current levels. The company’s long-term growth trajectory remains on track, positioning it well to capitalize on secular trends like EVs and factory automation.

What Do Analysts Expect For NXPI Stock?

Analysts have a consensus rating of “Moderate Buy” on NXP Semiconductors stock, with a mean target price of $263.81, which indicates an upside potential of 21.7% from Friday’s closing price. Among the 27 analysts giving recommendations for the stock, 17 rate it as a “Strong Buy,” two advise a “Moderate Buy,” seven suggest a “Hold,” and one has a “Strong Sell” rating.