Citi Bullish on Semis Despite Slump. This Stock Is the Firm’s Top Pick.

Citi Research named Microchip Technology as its top pick in the semiconductor industry. (Caitlin O’Hara/Bloomberg)

Citi Research analysts struck an upbeat tone Monday as they reiterated a Buy rating on a handful of stocks in the semiconductor industry.

While shares have broadly slumped, the firm indicated that a recovery could be on the horizon. The main driver of the sweeping selloff last week—which sent the benchmark SOX index down 5%—was a failure to meet lofty expectations.

Big names including Texas Instruments , Qualcomm, and Intel posted earnings results or guidance that fell short of those expectations, even as artificial-intelligence spending continued to accelerate, Citi wrote.

While aggregate estimates edged higher, “we believe both the Sellside and Buyside expected substantial raises to guidance, especially on margins,” analysts asserted.

The firm noted that the PHLX Semiconductor Index, better known as the SOX, was recently at a record high of 5932, “so technicals were more challenging as well.” The SOX tracks the performance of 30 of the largest U.S.-listed companies in the semi industry by market cap.

Analysts expect better news this week in the form of quarterly results from Advanced Micro Devices and Microchip Technology , “where we expect consensus estimates to edge higher.” Most important, Citi remains broadly positive on semis “given low inventory, especially in the analog space, and improving end demand.”

AI spending should serve as another catalyst, with hyperscalers including Meta Platforms and Microsoft raising their capital expenditure guidance by at least $30 billion for 2025. Citi’s own model projects data center capex to increase 35% in 2025 and 15% in 2026.

Out of all the players in the sector, Microchip remains Citi’s top pick. The firm sang its praises in a note last month, arguing shares would attract more buyers after fiscal first-quarter earnings on Aug. 7.

In the context of the latest selloff, the analysts predict the stock “will exhibit the most upside to estimates given its sales and margins have fallen the most from the peak.”

Citi rates Microchip at Buy with a $90 price target. Shares were up 1.1% at $67.07 on Monday, with the firm’s price suggesting potential 34% upside.

Other Buy-rated stocks in Citi’s coverage include Broadcom , Analog Devices , Micron Technology , NXP Semiconductors, and Texas Instruments. The firm is less enthusiastic about Qualcomm, Intel, ON Semiconductor, and GlobalFoundries, rating them at Neutral.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com