Citi is bullish on the AI super cycle continuing until 2026: simulation chips are expected to shine brightest, with Microchip Technology Incorporated (MCHP.US) being the top choice.

Citigroup believes that the super cycle of AI will continue until 2026, but warns that the risk-return balance is becoming less favorable. As costs related to OpenAI become apparent in the second half of 2026 and market concerns about debt used to fund AI development increase, volatility may intensify. Citigroup continues to favor NVIDIA Corporation (NVDA.US), Broadcom Inc. (AVGO.US), and Micron Technology, Inc. (MU.US) in the AI ecosystem. They also believe that the biggest positive surprise will come from the analog chip sector, and anticipate a turnaround in the sector in 2026 as inventory remains low, supply growth is slow, and profit margins are depressed. Microchip Technology Incorporated (MCHP.US) is listed as a top pick by Citigroup, with the expectation of the largest upside potential as their sales and profit margins have declined the most from peak levels. Other stocks rated as "buy" include Broadcom Inc., Micron Technology, Inc., Texas Instruments Incorporated (TXN.US), NXP Semiconductors NV (NXPI.US), and Analog Devices, Inc. (ADI.US). The bank stated, "We are favorable on Broadcom Inc., and see upside potential from the proliferation of Tensor Processing Units (TPUs)." Broadcom Inc. has confirmed Anthropic as the largest TPU customer of Alphabet Inc. Class C (GOOGL.US), contributing $21 billion in revenue by 2026. Analysts in a report on December 22nd stated, "We continue to believe there is more upside potential for Micron Technology, Inc., as the rise in DRAM prices in each quarter of 2026 will drive further upward revisions in consensus expectations." In terms of earnings, Citigroup expects Microchip Technology Incorporated's earnings per share (EPS) to grow more than fourfold, from $0.24 in the third quarter of 2025 to an expected $1.33 in the fourth quarter of 2027; and they anticipate Texas Instruments Incorporated's EPS to grow by 77%, from an expected $1.20 in the first quarter of 2026 to an expected $2.12 in the third quarter of 2027. Citigroup also mentioned that they prefer Synopsys, Inc. (SNPS.US) over Cadence Design Systems (CDNS.US), citing Synopsys, Inc.'s stronger potential for operating profit margin expansion. The company expects profit margins to benefit from cost-cutting measures, a higher proportion of software business, and a rebound in the IP (intellectual property) business.