2 chip stocks to avoid in near-term according to analysts at Truist

Investing.com -- Analysts at Truist Securities cut their ratings on two popular chip stocks, Microchip Technology (NASDAQ:MCHP), and Analog Devices (NASDAQ:ADI), citing valuation concerns and a less optimistic outlook on the broader semiconductor sector.

The firm downgraded Microchip stock from Buy to Hold, noting that while the company's fundamentals may have bottomed out, with a significant recovery expected in CY25, its stock is currently trading at a historically high price-to-earnings ratio.

Analysts also lowered the price target for MCHP to $80 from $89, aligning with a 24x multiple on the revised 2025 earnings per share (EPS) estimate of $3.33, down from the previous $3.69.

Alongside the downgrade of individual stocks, Truist also shifted its overall view of the semiconductor sector to Neutral from Constructive.

“We note that industry revenue growth has peaked and is entering a slow fade, while stock investment returns have been robust cycle-to-date, making significant additional returns from here more challenging,” analysts said in a note.

Meanwhile, Analog Devices also received a downgrade from Truist, moving from Buy to Hold.

Similar to MCHP, ADI's fundamentals are believed to have reached a low point, with a recovery anticipated in the calendar year 2025 (CY25).

“While bullish investors point to a significant recovery in CY25, we highlight that consensus already forecasts a recovery, with CY25 revenue growing 17% y/y (an average of 3% above-seasonal in each of the next six qtrs) and EPS growing 31%,” the note states.

Moreover, the stock is trading at 28x CY25 EPS, which analysts say is a peak for the company.

They have set a new price target for ADI at $233, down from $266, based on a 28x multiple, which reflects a traditional 7x discount compared to its analog peers.