Artificial intelligence (AI) stocks were a key driver behind the historic rally in tech stocks during the first half of this year, led by semiconductor names like Nvidia (NVDA), Broadcom (AVGO), and Advanced Micro Devices (AMD). With the industry-based VanEck Semiconductor ETF (SMH) boasting an outsized YTD return of 58.7%, it's easy to overlook just how lopsided the performance has been among individual chip stocks.

However, as we head into 2024, a more favorable macro environment for growth-fueled names could help to level the playing field for smaller companies and improve market breadth - especially if the U.S. economy can continue to sidestep a recession as the Fed fights inflation. 

With this in mind, here's a look at three semiconductor stocks that have underperformed this year - but Wall Street analysts are predicting significant upside ahead. 

Semtech

Founded in 1960 and based in California, Semtech (SMTC) is a leading global supplier of high-performance analog and mixed-signal semiconductors and algorithms. Semtech's products are used in a wide range of applications, including wireless and wired communications, infrastructure, industrial, automotive, and medical devices.

Commanding a market cap of $919.5 million, Semtech stock is down 45.8% in 2023 so far.

In its fiscal Q2 results, Semtech's net sales rose by 14% from the year-ago period to $238.4 million, while EPS fell 87.4% to $0.11 - but still managed to top the consensus estimate of $0.02. The company's bottom line has missed expectations on just one occasion out of the past five quarters.

Although the company reported a negative free cash flow in the quarter (-$18.9 million vs +$70 million in Q2 2023), long-term debt levels remained stable from the beginning of the year. Operating costs declined sequentially in the latest quarterly results, and that trend is set to continue, as the company projected a midpoint operating expense of $83 million for fiscal Q3 2024.

Looking ahead, SMTC's IoT system sales, which account for about 50% of total sales, are expected to have bottomed out, and inventory levels are set to normalize from 2024.

Overall, analysts remain bullish on Semtech stock, with a mean target price of $32.90. This denotes an upside potential of 112% from current levels. Out of 12 analysts covering the stock, 10 have a “Strong Buy” rating, one has a “Moderate Buy” rating, and one has a “Hold” rating.
 

Harmonic

Founded in 1988, Harmonic (HLIT) is a leading global provider of video delivery solutions for media companies, service providers, and enterprises. Harmonic's products are used to deliver high-quality video streaming and broadcast services to consumers globally. Its market cap currently stands at $1.19 billion.

Harmonic stock has pulled back 15.3% on a YTD basis.

In fiscal Q3, revenues came in 18.3% lower from the previous year at $127.2 million, as both the Broadband and Video segments reported declines. HLIT broke even on EPS, on an adjusted basis, but the results fell short of Wall Street's expectations.

On the plus side, Harmonic reported positive free cash flow ($9.1 million vs -$10.1 million in Q3 2022) and cash flow from operations in the quarter was $11 million, up from -$8.2 million in Q3 2022.

Looking ahead, Harmonic's superior product offerings, leading market position, and wider tailwinds for the streaming industry bode well. For instance, Harmonic's VOS360 SaaS platform for video provides broadcast-quality streaming services with cloud origination and targeted advertising. Similarly, in broadband, the CableOS software solution enables multi-gigabit internet speeds via cloud, virtualization and distributed access architectures.

On average, analysts have deemed Harmonic stock a “Strong Buy,” with a mean target price of $16.17 - indicating an upside potential of roughly 45% from current levels. Out of six analysts covering the stock, five have a “Strong Buy” rating and one has a “Moderate Buy” rating.

Ambarella

We conclude our list with the fabless semiconductor design company Ambarella (AMBA) . Founded in 2004, Ambarella is a leading developer of high-performance, low-power video compression and image processing solutions for a wide range of applications in a variety of devices, including security cameras, action cameras, drones, and set-top boxes. Its market cap currently stands at $2 billion.

Ambarella's share price is down more than 35% on a YTD basis.

Ambarella is facing the same headwinds of inventory reduction and near-term demand slowdown as its industry peer Semtech. In its latest earnings report, AMBA reported revenues of $62.1 million, down 23% from the previous year, and a narrower-than-forecast loss per share of $0.15, on an adjusted basis. 

However, a wider shift in the surveillance market toward lucrative Computer Vision (CV) technology is a positive for Ambarella, which has expertise in low-power, high-performance CV processors. The company remains committed to making further investments in the automotive and IoT markets, leaving it well-positioned for future growth.

Overall, analysts remain cautiously optimistic about the stock, with a consensus “Moderate Buy” rating and a mean target price of $72.71. This denotes an upside potential of about 35% from current levels. Out of 17 analysts covering the stock, eight have a “Strong Buy” rating, two have a “Moderate Buy” rating, six have a “Hold” rating, and one has a “Moderate Sell” rating.