Morningstar has urged investors to shift their focus away from the much-hyped AI chip sector. Instead, the equity research firm highlighted four traditional semiconductor makers it considers undervalued, with two picks potentially offering more than 70% upside. Morningstar’s note comes amid a surge in demand for AI accelerators, particularly Nvidia ‘s graphics processing units (GPUs). However, the firm’s latest research note suggested that investors might find better opportunities outside the AI chip frenzy. “Digital chipmakers appear overvalued, as we’re not fond of the risk/reward associated with digital stocks tied to AI, such as Nvidia and others,” said Morningstar’s equity strategists, led by Brian Colello, in a note to clients. “However, the median analog/mixed-signal chip name is 17% undervalued and represents most of our top picks in the sector.” Morningstar’s top picks include Infineon Technologies and STMicroelectronics : Infineon Infineon Technologies , Germany’s largest semiconductor manufacturer, stands to benefit from the increasing electrification of vehicles and the rise of electric cars, according to Morningstar. “Infineon is the worldwide leader in power semis, and given the electrification of the car and the rise of electric vehicles, the company should be well-positioned to aid in automotive powertrain development over the next decade, including the adoption of silicon carbide-based semis,” the firm’s strategists said. Morningstar expects Infineon shares to rise by 70% over the next 12 months to 50 euros a share ($54.90). The stock is also traded in the United States . STM STMicroelectronics , another Morningstar top pick, has strong partnerships in the automotive sector, including with electric vehicle giant Tesla. Morningstar believes the market’s concerns about the excess supply of silicon carbide semiconductors and potential competition from Chinese manufacturers may be overblown, suggesting STMicroelectronics stock has been “overly punished.” “We like ST’s exposure to the secular tailwinds around rising chip content per vehicle,” Morningstar said. The firm expects the U.S. listed stock to rise to $52 a share, indicating 85% upside, over the next 12 months.
