Here are Bank of America's favorite chip stocks for 2022

Published Mon, Jan 10 20223:35 PM EST

Despite the brutal sell-off that has engulfed the tech sector to start the year, Bank of America still sees good opportunities in several chip stocks. The bank said Monday in a note to clients that some semiconductor stocks are set up for a "bumpy yet rewarding ride," thanks to their "unique mix" of growth and profitability. It also noted that the PHLX Semiconductor Sector index (SOX) , which tracks the 30-largest semiconductor stocks by market cap, is up about 33% in the past year compared with the S & P 500's 23% gain. Concerns about rising rates could delay its outperformance this year "but not derail" it, analyst Vivek Arya said. "Rising rates are the biggest risk to semi industry valuation for CY22 in our view, leading to a potentially weak Q1. However, we assume a return to fundamentals once new rate regime is baked in," Arya said. "Semis have often outperformed the overall market in a rising rate environment. In fact, in every period that rates have risen since the late '90s, the SOX has outperformed the S & P." The firm forecasts 13% growth in chip industry sales after a calendar year of 24% year-over-year growth, Arya said. Here are Bank of America's favorite chip stocks for 2022. Nvidia has the most upside thanks to its exposure to gaming, the metaverse and autos, according to Bank of America, which sees sales growth between 25% and 30% in 2022. The bank's price objective on Nvidia is $375 per share, which is 37% above the stock's closing price of $272.47 on Friday. Bank of America also likes Marvell , Broadcom , Advanced Micro Devices and KLA Corp . "We continue to believe KLAC has a unique position as a key enabler of semiconductor manufacturing technology, a less cyclical topline, industry leading profit margins, and best-in-class shareholder returns," Arya said. The bank has a price target of $500 per share on KLA, implying a 19.9% upside from Friday's close. Teradyne and Applied Materials as other semi stocks that could see some upside, Bank of America said. Arya noted that the chip industry is "inherently cyclical" and suggested we're about 10 quarters into the current cycle, which typically could last at least 25 quarters. "Understanding where we are in the cycle is critical to investing in these stocks, particularly manufacturers that have much higher fixed cost structures and therefore could be more impacted by market downturns," he said.

A sign is posted in front of the Nvidia headquarters in Santa Clara, California, May 10, 2018.

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Despite the brutal sell-off that has engulfed the tech sector to start the year, Bank of America still sees good opportunities in several chip stocks.